Overview: Over the past week, stronger than expected economic data was negative for mortgage markets. In particular, consumer spending continued to surprise to the upside, far outweighing some good news on inflation. As a result, mortgage rates increased, returning to the highest levels in decades.
In September, retail sales surged 0.7% from August, far above the consensus for an increase of just 0.3%. Substantial gains again came from sales of gasoline, where prices climbed during the month. Beyond that, some of the strongest spending was seen in the categories of restaurants/bars and motor vehicle parts/dealers. Retail sales, which are not adjusted for inflation, were 3.8% higher than a year ago, roughly matching the annual increase in prices. Many economists have been anticipating that consumers will pull back their spending for a variety of reasons such as higher credit card rates, but they have been wrong so far.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility in the reading and get a better sense of the underlying inflation trend, investors often prefer to look at core CPI, which excludes the food and energy components. In September, core CPI was 4.1% higher than a year ago, down from 4.3% last month and the lowest level since September 2021. Shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase.
Additional inventory of homes available for sale continues to be desperately needed, and the latest data was somewhat encouraging. Following disappointing results last month, overall housing starts in September increased 7% from August. Single-family building permits, a leading indicator, rose to the highest level since May 2022. However, a separate survey of home builder sentiment on market conditions from the NAHB unexpectedly posted a large decline to the lowest level since January.
Retail Sales (% change)
October 19 — Existing-Home Sales report
October 25 — New-Home Sales report
October 26 — Q3 gross domestic product (GDP)
European Central Bank meeting