Overview: Over the past week, consumer spending dropped by an unexpectedly large amount. However, a major inflation report was higher than expected, which roughly offset the positive impact of the weak retail sales data on mortgage markets. As a result, mortgage rates ended the week with little change.
One of the big economic surprises of 2023 was the sustained strength of consumer spending in the face of higher prices and interest rates. To kick off 2024, however, retail sales in January plunged 0.8% from December, far worse than the consensus forecast for a decline of just 0.2%, and the largest monthly loss since March 2023. The results for prior months were revised lower as well. Unusually severe winter weather in many parts of the country likely was responsible for a portion of the disappointing results in January. For example, building materials and garden equipment dropped 4.1% from December. Weather does not sufficiently explain the unexpected weakness in several other areas, however, such as electronics, appliances, and clothing.
Like last week’s Consumer Price Index (CPI) inflation report, the Producer Price Index (PPI) data released this week was higher than expected. While CPI focuses on prices of finished goods and services, PPI measures the prices producers receive for their output. In January, PPI rose 0.3% from December, above the consensus forecast for an increase of just 0.1%.
The minutes from the January 31 Federal Reserve meeting released on Wednesday contained no significant surprises. Officials generally indicated that they are in no hurry to cut interest rates, pointing out that there are risks to both keeping monetary policy too tight for too long and to loosening it too quickly. They again emphasized that future decisions will be based on incoming economic data. In the minutes, officials noted “solid progress” in bringing down inflation but would like “greater confidence” that it will continue to trend lower. Due to recent higher-than-expected inflation data and comments from Fed officials, expectations for a reduction in the federal funds rate have been pushed out until later in the year. Most investors now anticipate that the first rate cut will not take place until June, several months later than the expected timeline at the beginning of the year.
Retail Sales (% change)
Week Ahead
Feb. 22
Existing-Home Sales report
Feb. 26
New-Home Sales report
Feb. 29
Personal Consumption Expenditures (PCE) Price Index
Personal Income and Outlays
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