It was another rough week for mortgage markets, as investors attempt to determine the appropriate level of yields for the current economic environment. It looked promising Wednesday afternoon when the Fed meeting revealed no policy changes and rates dropped from their peak. However, the climb resumed the next day, and mortgage rates ended the week higher.
As expected, the Fed made no change to the federal funds rate, and its statement contained no significant surprises. Notably, the Fed did not give any indication of adjusting its current $120 billion monthly pace of bond purchases. In addition, most officials expect that the federal funds rate will remain at current levels, near zero, through 2023. However, the growth and inflation forecasts from officials were significantly higher than in December, with median GDP growth for 2021 up from 4.2% to 6.5%, which would be the strongest level in decades. Given the increased optimism about the economic outlook, investors are watching closely for signs that the Fed will begin to scale back its bond purchases.
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. Sales were extremely volatile during the first half of 2002 due to the pandemic, but they then held relatively steady each month during the second half. Volatility has returned during the first couple of months of this year, however. After soaring an upwardly revised 7.6% in January due to the distribution of stimulus checks, retail sales unexpectedly declined 3.0% in February, restrained by severe weather in many regions.
Home construction also was negatively impacted by poor weather conditions in February, as housing starts fell 10% from January, which was a larger than expected decline. That said, distortions due to one-time events such as unusual weather provide little information about the longer-term trend.
Looking ahead, investors will continue watching Covid case counts and vaccine distribution. Beyond that, Existing Home Sales will be released on Monday and New Home Sales on Tuesday. Personal Income and the Core PCE price index, the inflation indicator favored by the Fed, will come out on Friday.
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