Market Perspective

Manufacturing and Services Remain Strong; Inflation Rises


Overview: Mortgage markets were relatively quiet over the past week. Modestly stronger than expected economic data was offset by concerns about the spread of the coronavirus, and rates ended the week with little change.

Gross domestic product (GDP), the broadest measure of economic activity, appears to be returning to more normal growth levels. Due to the pandemic, GDP declined a shocking 31% annualized during the second quarter of 2020 and then increased at a comparable rate of 33% annualized during the third quarter. However, fourth-quarter GDP growth was 4.3% annualized, which was close to expectations and more in line with historical readings.


While this week’s GDP data covered the fourth quarter of 2020, two other major reports released over the past week provided an early indication of solid performance for the economy in January. Coincidentally, both the Institute for Supply Management (ISM) Manufacturing Index and the ISM Services Index came in at 58.7, far above the readings close to 40 seen during the spring, and near the best levels in two years. Readings above 50 indicate an expansion in the sector.


The diminished economic activity resulting from the pandemic produced lower inflation, which was one of the factors responsible for the decline in mortgage rates during 2020. However, investors are concerned that inflation now may be on an upward path. In December, the core Personal Consumption Expenditures (PCE) Price Index was 1.5% higher than a year ago, which was well above the consensus forecast, and up from an annual rate of increase of 1.4% last month.


Week Ahead


Investors will continue watching COVID case counts and vaccine distribution. The 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. The Consumer Price Index (CPI) will come out on Wednesday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.

ISM Services Index


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