February 12th-16th 2024
Monday: A Day of Anticipation
The week kicked off with the 30-year fixed mortgage rate standing at 6.96%, with significant anticipation for the upcoming Consumer Price Index (CPI) data release on Tuesday. With the jobs report and Federal Reserve meeting still a month away, the market was squarely focused on the CPI and Producer Price Index (PPI) for immediate cues on inflation's trajectory. With yields nudging against the high for the year, the market eagerly awaited direction, not just from a nominal standpoint but also policy. Positive inflation data could bring us closer to the Fed cutting rates in March, and strong economic or rising inflation data could push that expectation to May or even further.
Tuesday Unveils CPI Data
Tuesday's CPI report was a pivotal moment, with core monthly inflation outpacing expectations at 0.4% against a forecast of 0.3%. This discrepancy, particularly with year-over-year figures holding at 3.9% versus the anticipated drop to 3.7%, sent bonds reeling and mortgage rates climbing to 7.13%. Clearly, the data implied that moving forward, the market will likely require significant and persistent evidence of an economic downturn before considering a shift in inflation's momentum.
Wednesday's Market Composite Index
On Wednesday, the Mortgage Bankers Association (MBA) provided insights into mortgage applications and refinancing activity. Last week saw a 2.3% decrease in mortgage loan application volume on a seasonally adjusted basis, reinforcing that consumers' activity in the housing market continues to be highly sensitive to the movement in mortgage rates. With no major economic data hitting the wire, it was a day for the market to digest Tuesday's CPI report, with the 30-year mortgage rate adjusting to 7.09%.
Thursday's Retail Sales Report
Thursday's retail sales report was a litmus test for consumer resilience amid rising rates and high inflation. Unexpectedly, retail sales fell by -0.8%, surpassing the anticipated -0.1% contraction; remember, negative economic data is good for interest rates. This data, juxtaposed against the backdrop of a generally robust consumer spending pattern, hints at potential shifts in economic sentiment and contributed to a slight easing of the 30-year fixed rate to 7.05%.
Friday and PPI's Influence
While the Producer Price Index typically holds less sway over bond market volatility compared to CPI, it shouldn't be overlooked because it reflects the wholesale supply chain and is a leading indicator for consumer prices. Friday's report showed a core month-over-month increase of 0.5% against a forecast of 0.1%; this highlighted the inherent unpredictability of wholesale inflation. Despite the notable deviation, the market's reaction was comparatively subdued, underscoring the nuanced role of the PPI in the current economic landscape and the fact that it is not unusual for the PPI to be more volatile compared to the CPI. The week concluded with the 30-year fixed mortgage rate inching up to 7.14%.
Looking Forward
Next week is a short week due to Presidents' Day on Monday and a relatively quiet one in terms of market-moving economic data. Tuesday will spotlight the release of the Leading Economic Indicators (LEI), which often reveal insights already anticipated by the markets. Wednesday's highlight is the Federal Reserve meeting minutes. Though highly scrutinized, these minutes often contain few surprises, with potential market volatility hinging on fresh revelations about the Fed's economic outlook or unexpected discussions on rate adjustments. The week wraps up on Thursday with a trio of reports: existing home sales, initial jobless claims, and S&P flash PMI, with jobless claims holding the most potential for market-moving volatility.
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