Despite some significant economic news last week, investors saw little reason to change their outlook for economic growth or future Fed policy. As a result, mortgage rates ended the week nearly flat.
Retail Sales Up double digits over last year
Consumer spending accounts for over two-thirds of U.S. economic activity, so the retail sales data is a key indicator of growth. In July, retail sales fell 1.1% from June, which was far below the consensus forecast for a decline of just 0.3%. Investors have
been growing increasingly concerned about the effect of the spread of Covid on consumer behavior, and this report suggests that the impact may be larger than expected.
On the other hand, sales still were 16% higher than a year ago and well above the levels seen before the pandemic. In addition, consumers have been shifting their spending from goods, which are included in retail sales, to services such as travel and entertainment, which are not. Another factor that limited the reaction was that a shortage of new vehicles due to a lack of chips and other components held back auto sales, rather than a lack of demand.
Supply Shortages Hold Back Housing Starts
Given the critical need for more homes in many areas, investors have been closely watching the monthly reports on housing starts, and the latest data contained mixed news. In July, housing starts fell 7% from June, but still were higher than a year ago. By contrast, building permits, a leading indicator of future activity, increased 3%. Rising prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction.
Fed Minutes Point to Change in Direction Next Month
The minutes from the July 28 Fed meeting released last Wednesday contained no significant surprises. According to the minutes, the Fed’s inflation goals had been achieved and officials were “close to being satisfied” with their employment goals. The minutes repeated the belief that elevated levels of inflation will be mostly transitory, but they also noted that risks remained to the upside. Investors now expect that the Fed will announce at the September meeting that it will begin to taper bond purchases during the fourth quarter, although the biggest wild card for the timeline remains the effects of the pandemic on future economic activity.
Major Economic News Due This Week
Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, Existing Home Sales will be released today and New Home Sales tomorrow. The core PCE price index, the inflation indicator favored by the Fed, and Personal Income will come out on Friday.