Overview: While the economic data released over the past week reinforced the view that inflation is moving higher, the major reports were all roughly in line with the expected levels. As a result, mortgage rates ended the week with little change.
The reduced economic activity resulting from the pandemic caused a large decline in inflation last year, which was one of the primary reasons we saw record-low mortgage rates. With the reopening of the economy, however, investors are now anticipating much higher inflation, and the latest report supported this view. The core Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Federal Reserve. In April, core PCE was 3.1% higher than a year ago, matching the consensus forecast, but up from an annual rate of increase of just 1.9% last month.
Much like the housing sector, the manufacturing sector has been operating at very high levels in recent months, but shortages of skilled workers and materials have been obstacles to even stronger activity. The latest reading of the Institute for Supply Management (ISM) Manufacturing Index rose to 61.2, which was slightly above the consensus forecast. Levels above 50 indicate that the sector is expanding. Many firms reported that they faced difficulties in hiring workers, acquiring raw materials, and transporting goods.
In government reports, durable goods are defined as items that last three years or longer. They tend to be expensive and generally are purchased infrequently, such as large appliances and vehicles. In April, new orders of durable goods fell 1.3% from March, which was far below the consensus forecast for a moderate increase. However, excluding the transportation category, which contains mostly aircraft orders that are highly volatile from month to month, new orders exceeded expectations with an increase of 1% from March. Overall, the mixed results were offsetting and had little impact on mortgage rates.
Looking ahead, the ISM Services Index will come out on Thursday. The key monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.
Core PCE (annual % change)