Market Perspective

Retail Sales Improve, Single-Family Starts Rise


Overview: Over the past week, stronger than expected economic data and increased expectations for additional government stimulus were negative for mortgage markets. Despite rising slightly, though, rates remained close to record-low levels.

Since consumer spending accounts for over two-thirds of all economic activity in the U.S., the retail sales data is one of the most closely watched reports each month. Following sharp declines in March and April, retail sales have shown five straight months of improvement and are above the levels seen prior to the pandemic. In September, they jumped 1.9% from August, far exceeding the consensus forecast for an increase of just 0.5%. Strength was seen in vehicles, sporting goods, and home improvement. Since stronger growth raises the outlook for future inflation, this report was mildly negative for mortgage rates.

While the headline number for Tuesday’s report on housing starts was a bit disappointing, a closer look at the details was far more encouraging, as the shortfall was entirely due to multi-family units. In September, overall housing starts rose just 2% from August, which was less than expected. However, single-family starts rose 9% from August and were 22% higher than a year ago. Similarly, single-family building permits, a leading indicator of future activity, increased 8% from August and were 24% higher than a year ago.

Lawmakers continue to negotiate an additional government aid package. If a deal is reached, an increased fiscal stimulus would be unfavorable for mortgage rates for two primary reasons. First, government spending boosts economic activity, which raises the outlook for future inflation. In addition, the supply of bonds goes up to fund the spending, so yields must rise to persuade investors to purchase more bonds.

Retail Sales (% change)

Week Ahead

October 22 — Existing Home Sales report

October 26 — New Home Sales report

October 29 — Third-quarter gross domestic product (GDP)

October 30 — Core Personal Consumption Expenditures (PCE) Price Index

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