Weaker than expected retail sales data was offset by progress on a government funding agreement this week, and mortgage rates ended nearly unchanged.
Consumer spending accounts for about 70% of all economic activity in the U.S., so the retail sales data is a key indicator of growth. The report for the important holiday shopping period was delayed by the government shutdown, but it finally was released on Thursday, and it was very disappointing. Since weaker growth reduces the outlook for future inflation, the data was positive news for mortgage rates.
In December, retail sales fell a massive 1.2% from November, far below the consensus for a small increase, and the largest monthly drop since September 2009. This was especially surprising since they have increased an average of about 0.4% per month since 2009. However, retail sales tend to be volatile month to month, and information from other sources such as the major credit card companies suggested that stronger spending took place around the holidays.
The most recent major inflation data came in very close to the expected levels and had little impact on mortgage rates. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. Investors generally prefer to look at core CPI, which excludes the volatile food and energy components, to get a better sense of the underlying trend. In January, core CPI was 2.2% higher than a year, and it has held steady close to this annual rate of increase for many months.
Uncertainty generally causes investors to shift from riskier assets such as stocks to safer ones such as bonds, including mortgage-backed securities (MBS). As a result, the recent difficulties in reaching a government funding agreement have increased the demand for MBS, which has been positive for mortgage rates. This week, however, the effect was reversed as the two parties in Congress put forth a last-minute compromise bill to avert another government shutdown, and it was signed by President Trump.
Looking ahead, it’s going to be a very light week for economic data. The minutes from the January 30 Fed meeting will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. Durable Orders, an important indicator of economic activity, and Existing Home Sales will be released on Thursday. Mortgage markets will be closed on Monday in observance of Presidents Day.
The government shutdown which began on December 22 and ended on January 25 has caused delays in the release of some economic reports produced by government agencies and likely will continue to do so until the affected agencies get caught up. It is generally not known when the postponed data will be ready to be released.
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