Overview: Since the Democrats gained control of the Senate on January 5, mortgage rates have climbed steadily due to expectations for increased government spending, while the economic data released over the past week caused little reaction. Rates moved higher from the record-low levels seen during the last several months of 2020.
With the Democrats now in control of both the Senate and the House, investors anticipate that there will be more government spending, which is likely to cause mortgage rates to rise for multiple reasons. First, this would require more debt to be issued to fund the spending, and the added supply would cause bond yields to rise. In addition, the increased economic activity resulting from government stimulus raises the outlook for future inflation, causing investors to demand higher yields.
Friday’s key Employment Report revealed that rising case counts of the coronavirus have caused more job losses than expected, particularly in the restaurant and hospitality sector. In December, the economy lost 140,000 jobs, far below the consensus forecast for an increase of 75,000, and the first monthly drop since the massive declines seen in March and April. Other areas of the report were more encouraging. The unemployment rate stayed flat at 6.7%, which was lower than expected. Average hourly earnings, an indicator of wage growth, rose 0.8% from November, far above the consensus for an increase of just 0.2%, and were a substantial 5.1% higher than a year ago.
The latest data released on Wednesday confirmed that current inflation levels remain low. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In December, core CPI, which excludes the volatile food and energy components, was just 1.6% higher than a year ago, the same annual rate of increase as last month.
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Week Ahead
January 15 — Retail Sales report
January 18 — Mortgage markets closed in observance of MLK Day
January 22 — Existing Home Sales report