Strong Economic Data

The major economic data on inflation and consumer spending released this week was stronger than expected. As a result, mortgage rates climbed to the highest levels since November.

While the annual rate of increase in Core CPI has fallen from a peak of 6.6% in September, it remains far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. To help reduce inflationary pressures and reach this goal, the Fed plans to continue to raise the federal funds rate. Investors currently anticipate that there will be additional 25 basis point rate hikes at the March and May meetings, with roughly a 50% chance for another at the June meeting. 

Consumer spending accounts for over two-thirds of US economic activity. Following two months of moderate declines, retail sales in January surged a massive 3.0% from December, far more than the consensus forecast. Gains were seen in every category. In particular, spending at restaurants and bars was 7% higher than in December, and vehicle sales climbed 6% from the prior month. 

Additional home inventory has been badly needed for quite a while, but the latest data was disappointing. In January, housing starts fell 5% from December to the lowest level since June 2020, early in the pandemic. In addition to elevated mortgage rates, builders reported that higher prices for materials and skilled labor continued to hold back a faster pace of construction. On a brighter note, though, builders are more optimistic about future conditions. The NAHB housing index showed that home builder confidence unexpectedly jumped from 35 to 42, the highest reading since September.

Investors will be closely watching to see if Fed officials elaborate on their plans for future rate hikes. Existing Home Sales will be released on Tuesday and New Home Sales on Friday. The core PCE price index, the inflation indicator favored by the Fed, also will come out on Friday.