Labor Market Surges 

A wide range of major economic data released this week was stronger than expected, which increases future inflationary pressures. As a result, mortgage rates climbed to their highest levels since April.

Two other significant economic reports released this week by the Institute of Supply Management again revealed diverging fortunes for two important segments of the economy. The ISM national services sector index rose to 54.1, above the consensus forecast. The national manufacturing index increased to 49.3, also above expectations, but this was still its ninth straight month under 50. Since readings above 50 indicate an expansion in the sector and below 50 a contraction, these reports continue to reinforce the fact that service companies have been outperforming manufacturers in recent months.

The minutes from the December 18 Fed meeting released on Wednesday provided a closer look at the reasons that officials shifted to a more hawkish (tighter) outlook for future monetary policy. As a reminder, the latest forecasts from officials following the meeting anticipated just two additional 25 basis point federal funds reductions this year, down from four rate cuts in the prior set of projections three months earlier. According to the minutes, unexpectedly stubborn recent inflation data and uncertainty about changes to trade and immigration policies were two primary considerations behind the revised outlook.

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy. For economic reports, the main event will be CPI on Wednesday. The Consumer Price Index (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 measure of the health of the economy. Housing Starts will come out on Friday.