Overview: Yet another stronger than expected economic report took its toll on mortgage markets over the past week. Similar to the latest inflation and labor market data, consumer spending exceeded the consensus forecast by a wide margin. As a result, mortgage rates climbed to the highest levels of the year.
Despite numerous headwinds such as higher prices and credit card rates, consumer spending continues to defy predictions for a slowdown. In March, retail sales jumped 0.7% from February, far above the consensus forecast, and the results for the prior month were revised significantly higher as well. The strongest categories were online retailers, gas, and miscellaneous retailers. Retail sales were 4% higher than a year ago, and this data is not adjusted for inflation. Although the rate of price increases over the past year has been unusually large, consumer spending has more than kept pace.
The surprisingly strong performance of the U.S. economy has shifted the outlook for future Federal Reserve policy. The consistent message in recent comments from Fed officials, including Chair Jerome Powell, is that they are in no hurry to cut interest rates. The unexpected strength seen in the inflation, consumer spending, and labor market data over the last few months provides little reason to loosen monetary policy any time soon. Officials generally prefer to wait for "greater confidence" that inflation will continue on a path down to their target level of 2%. Investors now anticipate that the first rate reduction by the Fed will not take place until September. By contrast, European Central Bank President Lagarde suggested this week that the ECB is on track to begin cutting rates in June.
The shortage of homes available for sale in many parts of the country persists. Additional supply continues to be sorely needed, yet the data released this week was disappointing. In March, single-family housing starts unexpectedly dropped 12% from February. Single-family building permits, a leading indicator of future construction, fell 6% to the lowest level since October 2023. On a brighter note, a survey of home builder sentiment on housing market conditions from the National Association of Home Builders (NAHB) held steady at the highest level in eight months.
Retail Sales (% change)
Week Ahead
April 18
Existing-Home Sales report
April 22
New-Home Sales report
April 25
Q1 gross domestic product (GDP)
April 26
Personal Income and Outlays
Personal Consumption Expenditures (PCE) Price Index