Inflation Remains Low

It was a relatively quiet week for mortgage markets. While current inflation levels remain low, investors are divided about its outlook for later in the year. Mortgage rates ended the week nearly unchanged.

Despite this tame report, however, some investors are concerned that inflation may increase significantly later in the year. Their reasoning is that it is not surprising that inflation remains low while economic activity is restrained by rising Covid case counts during the holiday season. As the vaccine rollout progresses, though, pent up demand in areas such as travel may be unleashed, causing prices to spike. 

On Wednesday, Fed Chair Powell said that Fed policy will remain accommodative until substantial progress is made in reaching full employment. According to Powell, the unemployment rate by some measures is closer to 10% than to the 6.3% reading seen in the latest Employment report.

While there is broad agreement that the government should provide more assistance to individuals and businesses harmed by the pandemic, lawmakers continue to negotiate the details. President Biden proposed a $1.9 trillion package, but some investors expect that the final size will be smaller. For mortgage rates, increased government spending is negative, since additional Treasury bonds must be issued to fund the spending, which causes a rise in yields, including mortgage rates. 

Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, Retail Sales will be released on Wednesday. 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. Housing Starts will come out on Thursday and Existing Home Sales on Friday. Mortgage markets will be closed on Monday for Presidents Day.