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Mixed Retail Sales Data; Construction Sector Strengthens

Overview: Over the past week, a limited trade deal with China was negative for mortgage rates, while the economic data caused little reaction. As a result, rates ended the week higher.


With additional tariffs set to go into effect on December 15, investors were on the lookout late last week for signs of progress in the trade talks between the U.S. and China. Given this, Friday's announcement that the two sides had reached a limited "phase one" trade agreement, which will reduce tariffs, was not entirely unexpected. It clearly was an unfavorable outcome for mortgage rates, though, since tariffs and other recently imposed trade barriers have slowed global economic activity. Faster economic growth raises the outlook for future inflation, which is negative for rates.

Friday's report on consumer spending in November was somewhat disappointing, especially in light of the important holiday shopping season. It revealed that retail sales in November rose just 0.2% from October, well below the consensus forecast for an increase of 0.5%. However, its impact was small since this year's late Thanksgiving date likely pushed forward some shopping into December. Retail sales still were a solid 3.3% higher than a year ago.

Since a lack of inventory has been holding back home sales activity in many regions, the latest reports hinting at faster construction were welcome news. In November, housing starts showed solid improvement from October and were 14% higher than a year ago. Building permits, which are a leading indicator of future construction, increased to the highest level since May 2007. In addition, the National Association of Home Builders (NAHB) housing market survey showed that home builder confidence jumped to 76, far above the readings near 60 seen a year ago, and the highest level since 1999.

Week Ahead

December 19 — Existing Home Sales report

December 20 — Core Personal Consumption Expenditures (PCE) Price Index

December 23 — New Home Sales report

News about the impeachment inquiry or the trade negotiations with China could influence mortgage rates. Trading volume in mortgage markets often is very light during the last couple of weeks of December, which can lead to increased volatility.

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