Economic Observer

Mixed Data

Overview: Wednesday's dovish Fed minutes caused a minor improvement in mortgage rates, while the major economic data released over the past week contained mixed results and was roughly offsetting. In addition, reduced concern about North Korea was slightly negative for mortgage rates. The net effect was that mortgage rates ended the week with little change.

The minutes from the July 26 Fed meeting were viewed as slightly more dovish than expected, which was good for mortgage rates. There appears to be growing uncertainty among Fed officials about when inflation will begin to increase. In recent months, the major inflation indicators have remained well below the Fed's target of 2.0%. According to the minutes, some Fed officials felt that the Fed "could afford to be patient under current circumstances" in terms of tightening monetary policy.

Recently released economic data contained mixed news. On Friday, the core Consumer Price Index (CPI) revealed that inflation in July was just 1.7% higher than a year ago, which was the same annual rate as in June. This was down from an annual rate of 2.3% in February. The surprisingly low inflation data was good for mortgage rates. However, Tuesday's Retail Sales report showed unexpectedly strong gains. In July, retail sales, excluding the volatile auto component, jumped 0.5% from June, and the June results were revised significantly higher as well. Stronger economic activity raises the outlook for future inflation, and mortgage rates rose due to the retail sales data.

Last week, rising tensions with North Korea benefited mortgage rates as investors shifted to safer assets such as bonds. As is often the case, a reversal in mortgage rates took place this week when investor sentiment changed. This week, it appeared that the situation with North Korea was less likely to escalate, and investors sold bonds to return to riskier assets.


Week Ahead

Looking ahead, investors will continue to keep an eye on the situation with North Korea. In addition, Industrial Production, an important indicator of economic activity, will be released on Thursday. The minutes from the July 20 European Central Bank meeting will also come out on Thursday and could influence U.S. markets. The New Home Sales report will be released on August 23, followed by Existing Home Sales on August 24.