Inflation Spikes

Investors were mostly focused on inflation this week, and the data was much stronger than anticipated. The Retail Sales report was roughly in line with expectations overall and caused little reaction. As a result, mortgage rates ended higher.

Since inflation reduces the value of future cash flows, higher levels are negative for mortgage-backed securities (MBS) and thus for mortgage rates. The pandemic caused a significant decline in inflation, which was a major factor behind the record low mortgage rates seen last year. With the reopening of the economy, however, investors have been worried about rising inflation, and the latest report certainly justified these concerns. 

Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth, and the results this month were mixed. In April, retail sales were flat from March, which was below the consensus forecast for a gain of 1.0%. However, the amazing March results were revised even higher from an increase of 9.8% to 10.7%, roughly offsetting the shortfall in the April figures. 

Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, it will be a very light week for economic data, with a focus on the housing sector. Housing Starts will be released on Tuesday and Existing Home Sales on Friday.