News/Blog

Inflation Jumps

Much stronger than expected key inflation data was negative for mortgage markets this week, and rates ended higher.

The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In October, Core CPI was 4.6% higher than a year ago, up from an annual rate of increase of 4.0% last month, and the highest level since 1991.

There are many reasons why the annual inflation rate has jumped from the readings below 2.0% seen earlier in the year, including a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. Shortages for many items have caused enormous cost increases, such as used cars prices which are 26% higher than a year ago. Fed officials and economists are divided about whether the recent spike in inflation is mostly due to temporary factors caused by the pandemic or are more structural (long-lasting) in nature. As the evidence piles up to support the latter case, investors have pulled forward the expected timeline for Fed rate hikes, and the first is anticipated to take place around the middle of next year.

The JOLTS report measures job openings and labor turnover rates, and the latest data indicated that the labor market remains very tight. At the end of September, there were a massive 10.4 million job openings, close to the recent record high. Openings are now well over three million higher than they were in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A record high number of employees also willingly left their jobs in September. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.

Looking ahead, investors will be seeking hints from Fed officials about the timing for future rate hikes and will closely watch Covid case counts around the world. Beyond that, Retail Sales will be released on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. Housing Starts will come out on Wednesday.

Weekly Change
10yr Treasuryrose0.10
Dowfell400
NASDAQfell200
CalendarWedCalendar
Tue11/16Retail Sales
Tue11/16Import Prices
Wed11/17Housing Starts

Strong Consumer Spending

Over the past week, inflation data that overall was a bit weaker than expected offset stronger than expected consumer spending, and mortgage rates ended slightly lower.

Economists had anticipated that the end of supplemental unemployment benefits for many people and a lack of inventory for some products would lead to a drop in consumer spending in September. Instead, retail sales jumped 0.7% from August, far above the consensus forecast for a decline of 0.2%, and were an impressive 14% higher than a year ago at this time.

A tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions are some of the main factors that have caused inflation to increase in recent months to the highest levels since 1991. The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In September, Core CPI, which excludes the volatile food and energy components, was 4.0% higher than a year ago, the same annual rate of increase as last month, but well above levels below 2.0% seen earlier in the year. Fed officials and economists are divided about whether the recent spike in the annual inflation rate is mostly due to temporary factors caused by the pandemic or will last for a long time.

The minutes from the September 22 Fed meeting released on Wednesday provided greater detail about the anticipated plans for tapering (scaling back) the massive bond purchase program which was initiated near the start of the pandemic to help the economy recover. The Fed currently buys $120 billion per month of Treasuries and mortgage-backed securities (MBS). According to the minutes, this will be reduced by $15 billion per month beginning in November or December, which would conclude the program during the middle of 2022. This closely matched investor expectations.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, it will be a light week for economic data with a focus on the housing sector. Housing Starts will be released on Tuesday and Existing Home Sales on Thursday.

Weekly Change
10yr Treasuryfell0.05
Dowrose500
NASDAQrose300
Calendar
Mon10/18Industrial Prod
Tue10/19Housing Starts
Thu10/21Existing Sales

Steady Inflation

There were no significant surprises in the economic data released this week. Inflation held steady from last month and the manufacturing sector remained strong. Mortgage rates ended the week nearly unchanged.

The core PCE price index is the inflation indicator favored by the Fed. In August, core PCE was 3.6% higher than a year ago, matching the consensus forecast. This was the same annual rate of increase as last month, but up from just 1.5% in February, and the highest annual rate since 1991. While economists have been expecting readings of this magnitude during the reopening of the economy, they have differing views on whether higher inflation will be a temporary spike or persist for years.

Another significant economic report released this week was from the Institute of Supply Management (ISM). Its national manufacturing index rose to 61.1, which was above the consensus forecast of 59.5. Levels above just 50 indicate that the sector is expanding, and readings above 60 are rare. Of note, a large number of companies reported difficulties in hiring enough workers to keep up with growing demand, and some indicated that supply chain disruptions were holding back production.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national service sector index will come out on Tuesday.

Weekly Change
10yr Treasuryrose0.02
Dowfell900
NASDAQfell700
Calendar
Tue10/5ISM Services
Tue10/5Trade Deficit
Fri10/8Employment

Retail Sales Jump

This week, the two biggest economic reports both contained significant surprises, but in opposite directions. Stronger than expected consumer spending modestly outweighed lower than expected inflation, and mortgage rates ended the week a little higher.

Consumer spending accounts for over two-thirds of U.S. economic activity, so the retail sales data is a key indicator of growth. In August, retail sales surged 0.7% from July, which was far above the consensus for a decline of -0.8%, although the results for July were revised lower. Sales were an impressive 15% higher than a year ago.

Particular strength was seen in department store and furniture sales, while auto sales were weak, mostly due to a lack of inventory resulting from chip shortages. Investors have been growing increasingly concerned in recent months about the effect of the spread of Covid on consumer behavior, but this report suggests that there is plenty of firepower available for shopping during the key back to school season.

The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In August, Core CPI was 4.0% higher than a year ago, which was much less than expected, and down from an annual rate of increase of 4.5% in June, a level not seen since 1991. Fed officials and economists are divided about whether the recent spike in the annual inflation rate is mostly due to temporary factors caused by the pandemic or will last for a long time, and this report supports the former view.

Looking ahead, investors will closely watch Covid case counts around the world. Beyond that, the next Fed meeting will take place on Wednesday, and investors will be looking for guidance about the timing for changes in monetary policy. Housing Starts will be released on Tuesday. Existing Home Sales will come out on Wednesday and New Home Sales on Friday.

Weekly Change
10yr Treasuryrose0.05
Dowfell100
NASDAQfell50
Calendar
Tue9/21Housing Starts
Wed9/22Fed Meeting
Wed9/22Existing Sales

Job Openings Surge

This week, the European Central Bank announced the expected policy change in its bond purchase program. The other major economic news contained no surprises, and mortgage rates ended the week with little change.

As expected, the European Central Bank (ECB) announced at Thursday’s meeting that it will reduce its bond purchases, but it did not specify by exactly how much. Instead, the meeting statement said that it will proceed with a “moderately lower pace” of net asset purchases over the next three months. While the US Fed has not yet begun to taper its bond buying, it is expected to do so before the end of the year.

The JOLTS report measures job openings and labor turnover rates, and the latest data indicated that the labor market is extremely tight. At the end of July, job openings unexpectedly surged to 10.9 million, shattering the former record high. Openings are now well over three million higher than they were in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills.

A large number of employees by historical standards also willingly left their jobs in July. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.

The Producer Price Index (PPI) is an inflation indicator for raw material costs for items which are used by producers to make finished products. In August, PPI rose 0.7% from July, which was close to the consensus forecast. PPI was 8.3% higher than a year ago, up from an annual rate of increase of 7.8% last month, and the highest level since 2010. Disruptions to supply chains caused by the pandemic have pushed up prices for many items.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, the Consumer Price Index (CPI) will be released on Tuesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Retail Sales will be released on Thursday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth.

Weekly Change
10yr Treasuryflat0.00
Dowfell500
NASDAQfell100
Calendar
Tue9/14CPI
Wed9/15Import Prices
Thu9/16Retail Sales

Retail Sales Drop

Despite some significant economic news this week, investors saw little reason to change their outlook for economic growth or future Fed policy. As a result, mortgage rates ended the week nearly flat.

Consumer spending accounts for over two-thirds of U.S. economic activity, so the retail sales data is a key indicator of growth. In July, retail sales fell 1.1% from June, which was far below the consensus forecast for a decline of just 0.3%. Investors have been growing increasingly concerned about the effect of the spread of Covid on consumer behavior, and this report suggests that the impact may be larger than expected.

On the other hand, sales still were 16% higher than a year ago and well above the levels seen before the pandemic. In addition, consumers have been shifting their spending from goods, which are included in retail sales, to services such as travel and entertainment, which are not. Another factor which limited the reaction was that a shortage of new vehicles due to a lack of chips and other components held back auto sales, rather than a lack of demand.

Given the critical need for more homes in many areas, investors have been closely watching the monthly reports on housing starts, and the latest data contained mixed news. In July, housing starts fell 7% from June, but still were higher than a year ago. By contrast, building permits, a leading indicator of future activity, increased 3%. Rising prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction.

The minutes from the July 28 Fed meeting released on Wednesday contained no significant surprises. According to the minutes, the Fed’s inflation goals had been achieved and officials were “close to being satisfied” with their employment goals. The minutes repeated the belief that elevated levels of inflation will be mostly transitory, but they also noted that risks remained to the upside. Investors now expect that the Fed will announce at the September meeting that it will begin to taper bond purchases during the fourth quarter, although the biggest wild card for the timeline remains the effects of the pandemic on future economic activity.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, Existing Home Sales will be released on Monday and New Home Sales on Tuesday. The core PCE price index, the inflation indicator favored by the Fed, and Personal Income will come out on Friday.

Weekly Change
10yr Treasuryfell0.02
Dowfell500
NASDAQfell150
Calendar
Mon8/23Existing Sales
Tue8/24New Home Sales
Fri8/27Core PCE

GDP Falls Short

There was no shortage of major economic news this week, but none caused much reaction. The Fed meeting produced no significant surprises, and the GDP report was roughly neutral overall. Mortgage rates ended the week a little lower.

The headline number for second quarter gross domestic product (GDP), the broadest measure of economic activity, showed annualized growth of just 6.5%, well below the consensus forecast of 8.5%. However, the details of the report revealed that the shortfall was almost entirely in areas which simply postponed growth until future quarters. For example, inventory drawdowns subtracted roughly 1.2% during the quarter, as supply shortages caused delays in the production of cars, homes, and many other items. These inventories will need to be replaced, adding to future economic activity. Underlying demand remained very strong, as personal consumption expenditures surged 11.8%. With the second quarter growth, the size of the economy is now larger than before the pandemic, and early estimates for third quarter GDP growth are for an even stronger 7.0% annualized rate.

The core PCE price index is the inflation indicator favored by the Fed. In June, core PCE was 3.5% higher than a year ago, a little below the consensus forecast, but up from an annual rate of increase of 3.4% last month and just 1.5% in February. This was the highest annual rate in decades. While economists have been expecting readings of this magnitude during the reopening of the economy, there are differing views on whether higher inflation will be a temporary spike or persist for years.

The Fed provided very little new or unexpected information at their meeting on Wednesday. Since March 2020, the Fed has been buying $120 billion of mortgage-backed securities (MBS) and Treasuries to help the economy offset the negative effects of the pandemic. This year, Fed officials have repeatedly said that they will not begin to scale back (taper) these purchases until the economy achieves “substantial further progress” toward reaching their labor market and inflation targets. Investors have been constantly seeking more concrete information about the projected timeline, but officials again provided no precise guidance. The statement released after the meeting simply said that the economy “has made progress” toward their goals this year. The increased demand for MBS from the Fed helped push mortgage rates to record lows, so investors are keeping a close eye on the future outlook for the bond buying program.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will come out on Monday and the ISM national services index on Wednesday.

Weekly Change
10yr Treasuryfell0.05
Dowfell100
NASDAQfell150
Calendar
Mon8/2ISM Manuf
Wed8/4ISM Services
Fri8/6Employment

Inflation Surges

Investors were focused on inflation this week, and the most recent data was stronger than expected. However, soothing comments on the subject from the Fed helped calm investor concerns, and mortgage rates ended the week nearly unchanged.

In June, the core Consumer Price Index, a closely watched inflation indicator which excludes the volatile food and energy components, surged 0.9% from May, above the consensus forecast for an increase of just 0.5%. Particularly large gains were seen in prices for items affected by the pandemic such as used cars and airline tickets. Core CPI was 4.5% higher than a year ago, up from an annual rate of increase of just 1.6% in March, and the highest level since 1991.

During his semiannual testimony to Congress, Fed Chair Powell suggested that it was too soon to begin to tighten monetary policy and that achieving sufficient progress toward full employment was still “a ways off.” He acknowledged that inflation has climbed substantially and “will likely remain elevated” in coming months, but he expects it to moderate over time as imbalances caused by the pandemic ease. Investors viewed Powell’s patient attitude toward inflation as an indication that the Fed is not in a hurry to scale back its bond purchase program, which was good news for mortgage rates.

Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. In June, retail sales rose 0.6% from May, which was far above the consensus forecast for a moderate decline. Sales were 18% higher than a year ago and well above the levels seen before the pandemic. The strong results were even more impressive in light of current conditions. First, a shortage of new vehicles due to a lack of chips and other components held back auto sales. In addition, consumers have been shifting their spending from goods, which are included in retail sales, to services such as travel and entertainment, which are not.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, it will be a very light week for economic reports with a focus on the housing market. Housing Starts will be released on Tuesday and Existing Home Sales on Thursday.

Weekly Change
10yr Treasuryfell0.02
Dowfell100
NASDAQfell200
7/22Calendar
Tue7/20Housing Starts
Thu7/22Existing Sales
Thu7/22Jobless Claims

Solid Job Gains

Friday’s highly anticipated monthly labor market report was roughly in line with expectations, and mortgage rates ended the week nearly unchanged.

In May, the economy gained 559,000 jobs, a little below the consensus forecast of 650,000. Particular strength was seen in the leisure and hospitality sectors. The unemployment rate fell to 5.8%, slightly below the consensus of 5.9%. Average hourly earnings, an indicator of wage growth, were 2.0% higher than a year ago, up from an annual rate of increase of 0.4% last month.

Even with another month of solid job gains, the economy still has a long way to go to recover the losses due to the pandemic. It has about seven million fewer jobs than it did early last year. This is a primary reason why Fed officials have expressed a desire to move slowly before tightening monetary policy.

A couple of other significant economic reports released this week from the Institute of Supply Management (ISM) remained at very high levels, as expected. The national manufacturing index rose to 61.2, and the national services index increased to 64.0, a record high. Levels above 50 indicate that the sectors are expanding. Of note, a large number of companies reported difficulties in hiring enough workers to keep up with growing demand.

Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, the Consumer Price Index (CPI) will come out on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank meeting also will take place on Thursday.

Weekly Change
10yr Treasuryfell0.01
Dowrose100
NASDAQrose50
Calendar
Thu6/10CPI
Thu6/10ECB Meeting
Fri6/11JOLTS

Inflation Climbs

The two major reports released this week on inflation and durable goods were roughly in line with expectations, and mortgage rates ended nearly unchanged.
The reduced economic activity resulting from the pandemic caused a large decline in inflation last year, which was one of the factors responsible for record low mortgage rates. With the distribution of the vaccine and the reopening of the economy, investors are now concerned that inflation may be heading much higher, and the latest data reinforced this view.
The core PCE price index is the inflation indicator favored by the Fed. In April, core PCE was 3.1% higher than a year ago, matching the consensus forecast, but up from an annual rate of increase of 1.9% last month. The question facing investors is whether higher inflation is mostly due to temporary factors related to the reopening of the economy or to more persistent issues, and the answer will have a big impact on future mortgage rates.
In economic terms, durable goods are items which last three years or longer, tend to be expensive, and generally are purchased infrequently, such as large appliances and vehicles. In April, new orders of durable goods fell 1.3% from March, which was far below the consensus forecast for a moderate increase. However, excluding the transportation category, which contains mostly aircraft orders that are highly volatile from month to month, new orders exceeded expectations with an increase of 1.0% from March. In addition, the figures for March were revised higher. As a result, the report was viewed as roughly neutral overall for mortgage rates.
Similar to last week’s report on existing home sales, the data on new home sales released this week fell short of expectations. In April, new home sales declined 6% from March, and the March results were revised significantly lower. A lack of inventory, especially in the lower price range, remained a major obstacle. The median new home price of $372,400 was 20% higher than last year at this time.
Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national manufacturing index will come out on Tuesday and the ISM national services index on Thursday. Mortgage markets will be closed on Monday for Memorial Day.
Weekly Change
10yr Treasuryflat0.00
Dowrose400
NASDAQrose300
Calendar
Tue6/1ISM Manuf
Thu6/3ISM Services
Fri6/4Employment