Overview: There were two primary influences on mortgage rates over the past week, which were offsetting. Stronger than expected economic data was negative for rates, while the rise in yields in recent weeks increased the demand for bonds, which was positive. The net effect was a good deal of volatility, but little net change in mortgage rates.
The two biggest economic reports released over the past week came out on Friday. The core Consumer Price Index (CPI), a key monthly inflation indicator, revealed a larger than expected increase in December. Core CPI, which excludes the volatile food and energy components, rose 0.3% from November, above the consensus for an increase of just 0.2%. It was also 1.8% higher than a year ago, up from an annual rate of 1.7% last month. If core inflation continues to go up, the Fed will be more likely to hike rates at a faster pace.
Consumer spending accounts for about 70% of economic activity in the U.S., and the Retail Sales report is an important indicator. In December, the report showed the expected level of gains with an increase of 0.4% from November. However, the figures for November were revised higher, causing investors to view the report as stronger than anticipated. Faster economic growth raises the outlook for future inflation. Since inflation is negative for mortgage rates, both the CPI data on current inflation and the retail sales report were negative for mortgage rates on Friday.
Looking ahead, the New Residential Construction report (also known as Housing Starts) will come out on Thursday. The Existing Home Sales report will be released on January 24, and the New Home Sales report comes out January 25. The first reading for fourth quarter gross domestic product (GDP), the broadest measure of economic activity, will come out on January 26. In addition, investors will be watching for news about a bill to keep the government funded beyond January 19.