Extremely strong economic reports were negative for mortgage markets this week. With the rollout of the Covid vaccine gaining steam and additional government stimulus on the way, most investors expect that future data will be even more impressive. As a result, mortgage rates ended the week at their highest levels in months.
Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Following three straight months of declines, sales jumped sharply in the latest report, boosted by the $600 stimulus payments distributed to millions of people. In January, retail sales increased a massive 5.3% from December, far above the consensus forecast of 1.2%.
The spectacular rebound in the housing sector from weakness during the spring has continued. In January, Existing Home Sales unexpectedly increased from December and were 24% higher than a year ago, near the best level since 2006. The median existing-home price was 14% higher than a year ago. Inventory levels, however, were down 26% from a year ago and remained the primary obstacle to even stronger sales activity. The number of homes for sale was at just a 1.9-month supply nationally, well below the 6.0-month supply which is considered a healthy balance between buyers and sellers.
The reduced economic activity resulting from the pandemic has caused a significant decline in inflation, which has been positive for mortgage rates. However, investors have become concerned by some emerging signs that inflation may be rising. The Producer Price Index (PPI) is a widely followed monthly inflation report that looks at the price change for intermediate goods used for production, making it an early indicator of building inflationary pressures throughout the economy. In January, core PPI was 2.0% higher than a year ago, which was far higher than expected, and up from an annual rate of increase of just 1.2% last month.
Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, it will be a light week for economic data. Of note, Personal Income and the Core PCE price index, the inflation indicator favored by the Fed, will be released on Friday.
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