Overview: Over the past week, increased concern about the spread of COVID and its potential to slow global economic growth was positive for mortgage markets. The major economic data caused little reaction, and mortgage rates ended the week a bit lower.
The variants of COVID have caused a surge in case counts around the world, which could cause people to again scale back certain activities such as travel and eating out. If this happens, it will slow economic growth and reduce future inflationary pressures. Lower inflation is good for bonds, and the potential for reduced inflation is helping to push mortgage rates lower.
Consumer spending accounts for over two-thirds of U.S. economic activity, so the retail sales data is a key indicator of growth. In June, retail sales rose 0.6% from May, which was far above the consensus forecast for a moderate decline. Sales were 18% higher than a year ago and well above the levels seen before the pandemic. Investors were caught off guard by the impressive results because a couple of current trends suggested that some weakness would be seen. First, a shortage of new vehicles due to a lack of chips and other components held back auto sales. Beyond that, as the economy has been reopening, consumers have been shifting their spending from goods, which are included in retail sales, to services such as travel and entertainment, which are not. Uncertainty about the impact of the spread of COVID on consumer spending will make forecasting future Retail Sales reports more difficult.
Since there has been a severe shortage of inventory of homes for sale in many regions for quite a while, the New Residential Construction report (aka Housing Starts) receives a great deal of attention each month, and the latest data contained mixed news. On the positive side, housing starts in June rose 6% from May, which was well above the consensus forecast, and they were 29% higher than a year ago. Less encouraging, though, permits for future homebuilding fell 5% from May, which was below expectations and the lowest level since October 2020. In addition, many builders reported that delays of several months for items such as windows, refrigerators, and heating units were slowing the pace of construction.
Retail Sales (% change)
Week Ahead
July 22 — Existing-Home Sales report
July 26 — New-Home Sales report
July 29 — Second-quarter gross domestic product (GDP)
July 30 — Core Personal Consumption Expenditures (PCE) Price Index