The most significant economic report released over the past week, retail sales, fell far short of expectations, which was good for mortgage rates. A decline in bond yields overseas also helped, and mortgage rates ended the week lower.
After several months of strong readings, Friday's retail sales data fell far short of expectations. Excluding the volatile auto component, retail sales in July fell 0.3% from June, below the consensus for an increase of 0.2%. Auto sales rose a strong 1.1% in July, and total retail sales in July were flat from June, but again this was far below the consensus for an increase of 0.4%. .
Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Consumer spending during the second quarter was one of the bright spots for the economy. Since the data can be volatile from month to month, investors will be closely watching to see if the July results reflected just a temporary pause or the start of a longer period of weaker spending. Slower economic growth reduces the outlook for future inflation, so the retail sales data was positive for mortgage rates.
Over the past week, bond yields overseas declined. When this happens, it makes the yields on U.S. bonds relatively more attractive to global investors, driving up the demand. This in turn causes the price of U.S. bonds to rise and yields to fall. The strong demand was seen at the Treasury auctions which took place this week. Mortgage-backed securities (MBS) prices also rose, causing mortgage rates to move lower.
Looking ahead, the Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Tuesday. CPI looks at the price change for goods and services which are sold to consumers. Housing Starts also will come out on Tuesday. The minutes from the July 24 Fed meeting will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials and have the potential to significantly move markets.
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