The inflation data in Europe released last week revealed sharp increases, which caused global bond yields to rise, including U.S. mortgage rates. The U.S. economic news had little impact.
European Union Inflation Rates Continue Rising
While inflation in the U.S. has been moderating a bit recently, it has surged to record levels in Europe. The latest report from the European Union revealed a massive annual rate of increase of 8.9%, while the figures for the UK were an even higher 10.1%. Like the U.S. Fed, European Central Bank officials target an annual inflation rate of just 2.0%. Achieving this goal will be even more challenging in Europe, however, due to the steep increase in energy prices resulting from the conflict in Ukraine.
Low Inventory Continues to Pinch Existing Home Sales
Higher mortgage rates have continued to take their toll. Sales of existing homes fell for the sixth straight month in July to the slowest pace since May 2015 (excluding the dip near the start of the pandemic) and were 20% lower than last year at this time. Inventory levels were unchanged from a year ago, at just a low 3.3-month supply nationally. The median existing-home price was 11% higher than a year ago at $403,800.
Housing Starts Stall Again in July
Inventory levels have been a lingering issue, but relief from new construction continues to be painfully slow. In July, housing starts of single-family units dropped 10% from June to the lowest level since June 2020. An unusually high 16% of homes that went into contract for purchase in July were canceled. A separate survey of home builder sentiment from the NAHB declined for the eighth straight month to the lowest reading since early in the pandemic. Higher prices and shortages of land, materials, and skilled labor again were listed as major issues holding back a faster pace of construction.
Electronic Sales Up While Most Retail Remained Flat
Since consumer spending accounts for over two-thirds of US economic activity, it is an important indicator of the health of the economy. In July, retail sales were flat overall from June. While the dollar value of gas sales declined sharply due to lower gas prices, consumers used their savings to purchase other items. In particular, strength was seen in sales of electronics, which are commonly boosted by back-to-school shopping.
Fed Meeting Minutes Offers Little Detail on Future Plans
The Minutes from the July 27 Fed meeting released on Wednesday contained no surprises and offered no specific guidance on future monetary policy. Officials simply said that decisions on how aggressively to fight inflation will be made based on incoming economic data. They debated the relative risks of tightening monetary conditions too much, causing unnecessary economic weakness, versus not enough, risking that inflation could become “entrenched.”
Major Economic News Due This Week
Looking ahead, investors will watch for Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, New Home Sales will come out on Tuesday. Durable Orders will be released on Wednesday, an important indicator of economic activity. The core PCE price index, the inflation indicator favored by the Fed, will come out on Friday. Fed Chair Powell is also scheduled to speak at the Jackson Hole Conference on Friday.