Overview: The major economic news over the past week was generally favorable for mortgage markets. Consumer spending fell sharply, inflation eased, and the Bank of Japan did not tighten monetary policy as feared. As a result, mortgage rates declined to the lowest levels since September.
Consumer spending accounts for over two-thirds of U.S. economic activity, making it an important indicator of the health of the economy. In December, retail sales plunged 1.1% from November, more than the consensus forecast, and the results for November were revised significantly lower. Large losses were seen in spending at department stores, furniture stores, and auto dealers. While October was a strong month for retail sales, the holiday season overall was somewhat disappointing this year.
The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term inflation trend. Core CPI in December was up 5.7% from a year ago, matching the consensus forecast, but down from an annual rate of 6% last month. Inflation remains far above the readings around 2% seen early in 2021, which is the stated target level of the Federal Reserve. To help bring down inflation, the Fed expects to raise the federal funds rate a little more at future meetings, and the markets have priced this in. However, the outlooks of Fed officials and investors diverge after that. Nearly all officials have stated that rates will be held steady at their peak level through the end of 2023, while investors anticipate that slower economic growth will lead to Fed rate cuts later in the year. The weakness in consumer spending in recent months favors the view of investors.
While there had been much speculation that the Bank of Japan (BOJ) would tighten monetary policy on Wednesday, it made no change. The meeting statement explained that loose policy is still needed because “extremely high uncertainties for Japan’s economy” remain. Since tightening would have reduced the demand for bonds, the news caused global yields to decline, including U.S. mortgage rates.
Retail Sales (% change)
New Residential Construction report (also known as Housing Starts)
Existing-Home Sales report
Fourth-quarter gross domestic product (GDP)
New-Home Sales report
Core Personal Consumption Expenditures (PCE) Price Index