The latest weekly market update has arrived. Will we see an interest rate cut?

 

Housing Starts Surge

It was a quiet week for mortgage rates. There were no significant new developments with China or Iran, and the reaction to the economic data was small. As a result, rates ended the week nearly unchanged.

A lack of inventory has been holding back home sales in many regions, so Friday’s report on home construction was very encouraging. In December, housing starts rocketed 17% from November, which completely blew away the consensus forecast, and were at the best level since 2006. They were a massive 41% higher than a year ago. The strength was seen across the board in both single-family and multi-family units.

Since consumer spending accounts for about 70% of all economic activity in the US, the monthly retail sales data is a key indicator of growth. The latest report revealed that consumer spending remained solid during the important holiday shopping season. In December, retail sales rose 0.3% from November and were up an impressive 5.8% from one year ago. Once again, the greatest improvement was seen in online sales.

As expected, inflation held steady in December. According to the Consumer Price Index (CPI), a widely followed monthly inflation report that looks at the price change for goods and services, core inflation was 2.3% higher than a year ago. This was the same annual rate of increase as last month.

Looking ahead, it will be a very light week for economic data. Of note, Existing Home Sales will be released on Wednesday. Beyond that, the next European Central Bank meeting will take place on Thursday. In addition, news about Iran or the trade negotiations with China could have an influence.

Economy Slows

The major economic data released this week was mostly weaker than expected, which reduced the outlook for future inflation. This was positive for mortgage rates, and they ended the week lower. 

As expected, Friday’s key monthly Employment report was consistent with a slower pace of job creation from the very strong levels seen over the last couple of years. Against a consensus forecast of 145,000, the economy gained 136,000 jobs in September, and upward revisions added another 45,000 to the results for prior months. The unemployment rate, which is calculated based on surveys of workers, unexpectedly declined from 3.7% to 3.5%, which was the lowest level since 1969.

 

The other major component of the labor market report contained much less encouraging news, however. Average hourly earnings, an indicator of wage growth, were flat from August, far below the consensus for a substantial gain. They were 2.9% higher than a year ago, down from an annual rate of increase of 3.2% last month. 

In addition to the disappointing wage data, two closely watched reports from the Institute of Supply Management (ISM) released this week revealed weaker than expected economic growth. The ISM national services index, which covers the bulk of U.S. economic activity, showed a sharp drop to 52.6, which was the lowest level since August 2016. The ISM national manufacturing index declined to just 47.8, which was the worst reading since June 2009.

Looking ahead, The JOLTS report, which measures job openings and labor turnover rates, will be released on Wednesday. Fed officials value this data to help round out their view of the strength of the labor market. The minutes from the September 17 Fed meeting also will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. The Consumer Price Index (CPI) will be released on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. In addition, news about the impeachment inquiry or the trade negotiations could influence mortgage rates.