Overview: The biggest surprise over the past week was a disappointing report on consumer spending, which was modestly positive for mortgage rates. The Federal Reserve made no policy changes at its meeting, and the reaction was minor. Rates remained near record-low levels.
Following sharp declines during the spring due to the pandemic, retail sales have recovered impressively and have reached record-high levels in recent months. However, the latest report fell far short of expectations. In November, retail sales declined 1.1% from October, and the results for October were revised lower. Particular weakness was seen in motor vehicles and clothing. Investors are concerned that rising coronavirus case counts are significantly slowing consumer spending during the holiday shopping period. Since consumer spending accounts for over two-thirds of all economic activity in the U.S., the retail sales data is a crucial indicator of the state of the economy.
The reduced economic activity resulting from the pandemic has caused a decline in inflation, contributing to low mortgage rates. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In November, core CPI was just 1.6% higher than a year ago, down from an annual rate of increase above 2% in the months prior to the pandemic.
Wednesday's Fed meeting produced no surprises. As expected, monetary policy will remain highly accommodative to help support the economy, and officials anticipate that they will not raise the federal funds rate during the next few years. According to the statement, this will be consistent with their dual goals of maximum employment and an inflation target averaging 2% annually over the longer term. Some investors were disappointed that officials did not increase the level of future asset purchases by the Fed.
Retail Sales (% change)
December 17 — New Residential Construction report (aka Housing Starts)
December 22 — Existing Home Sales report
December 23 — New Home Sales report
December 23 — Core PCE Price Index
Trading volumes typically are light during the last couple of weeks of the year, which means that price movements without any apparent cause are more common.