Overview: Over the past week, strong labor market data was offset by weaker-than-expected reports from the manufacturing and service sectors. Highly anticipated news from the Fed had little net effect, and mortgage rates ended nearly unchanged.
Since it raised the outlook for future inflation, strong wage and job gains in the highly watched monthly Employment Report were negative for mortgage rates. The economy added a massive 312,000 jobs in December, far above the consensus forecast of 180,000, and upward revisions added 58,000 jobs to the results for prior months. Average hourly earnings, an indicator of wage growth, also surpassed expectations. They were 3.2% higher than a year ago, up from 3.1% last month, and matched the highest annual rate of increase since April 2009.
In contrast to the strong labor market data, two other major economic reports released over the past week fell short of expectations and thus were good for mortgage rates. The Institute for Supply Management (ISM) Manufacturing Index declined sharply from 59.3 to 54.1, far below the consensus of 58.0, while the ISM Services Index missed by a smaller margin.
Investors also received significant news from the Fed over the past week. On Friday, Fed Chair Powell said that the Fed is not on a "preset path" for monetary policy and will make future decisions based on changing financial conditions. Investors were encouraged that the Fed may scale back the pace of monetary tightening. Wednesday’s minutes from the December 19 Fed meeting supported this view. The minutes said that recent financial market volatility and signs of slowing global economic growth had made “the extent and timing” of further tightening “less clear.”
Looking ahead, the Consumer Price Index (CPI) will come out on Friday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The Retail Sales report will be released on January 16. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. Housing Starts will come out on January 17. The government shutdown could affect some of these release dates.