Mortgage Rate Growth & Economic Recovery

While the economy is on the path towards recovery, 2021 showed its first signs of mortgage rate growth. Meanwhile, COVID-19 aid is on the way in tandem with a continual vaccine rollout. As a result, the United States demonstrates many positive trends towards job and economic growth heading into the spring.

However, numerous investors and experts remain wary of government spending. Not only that, the impact of positive economic feedback could create issues with the aforementioned mortgage rate growth. Finally, although inflation previously saw a decline, analysts allude to a corrective surge later in 2021.

All of this (and more) characterized an exciting start for mortgage-backed securities in what should be a unique new year.

Investors Wary of Inflation Spike Due to Mortgage Rate Growth

Out of the gate, current inflation levels remained low. However, investors are divided about its outlook for later in the year. 

The coronavirus pandemic stifled economic activity. This resulted in a pandemic-attributed inflation decline. Many see this as one of the primary factors responsible for record-low mortgage rates. In addition, the latest figures revealed that current levels are even lower than expected. 

The Consumer Price Index (CPI) is a widely followed monthly inflation report. CPI examines the price change for goods and services. In January, Core CPI was just 1.4% higher than a year ago. This was down from an annual rate of increase of 1.6% in December. It’s also lower than the 2.3% in February 2020.

Despite this tame report, some investors worry about a significant inflation increase later in the year. Their reasoning is that it is not surprising. During the holiday season, inflation remained low when rising COVID-19 cases restrained economic activity.

But this may not be the case for long. As the vaccine rollout progresses, many industries anticipate pent-up demand. One of these is the travel industry, which may be due for price spikes among fully unleashed demand.

How Inflation Could Affect the Future of the Stock Market

With inflation expectations for the end of 2021 rising recently, many experts are left wondering where that could leave the immediate future of the stock market. Rising inflation could cause investors to react by selling off stock. Should this occur, the stock market could see a dip in the market. However, this dip could open up more buying opportunities for many others.

Experts say that stocks can be a hedge against inflation because of the way inflation impacts equity in largely offsetting ways. In other words, if inflation continues to rise as it is expected, a lull in the market later this year could make for an opportunity for investors.

Inflation fears have already begun to impact the stock market by affecting stock prices in industries, like technology, which saw a long slide to start the month of March.

Inflation’s Impact on Mortgage Rate Growth

The reduced economic activity resulting from the pandemic has caused a significant decline in inflation. This kept mortgage rates near record-lows. However, investors have become concerned by some emerging signs that inflation may be on the rise. 

The Producer Price Index (PPI) is a widely followed monthly inflation report. PPI examines the price change for intermediate goods used for production. This makes PPI an effective early indicator for building inflationary pressures throughout the economy.

In January, Core PPI was 2.0% higher than a year ago. Overall, this was far higher than expected. Also, January’s Core PPI is up from an annual rate of increase of just 1.2% last month.

As mentioned, the reduced economic activity resulting from the pandemic caused a significant decline in inflation last year. Just to reiterate, this was one of the factors responsible for record-low mortgage rates. 

However, investors are now concerned that inflation may be heading higher. In January, the Core PCE price index was 1.5% higher than a year ago. Ultimately, the Core PCE price index rose above was above the consensus forecast. It also notched above the annual rate of increase of 1.4%.

FED Expects Temporary Rise in Inflation in Late 2021

During his semi-annual testimony, Fed Chair Powell suggested that easy monetary policy will remain in place for a while since the economy is “a long way from our employment and inflation goals.”

In particular, Powell noted that the economy still needs to recover 10 million jobs lost due to the COVID-19 pandemic. While investors are concerned about rising inflation, Powell appeared to be less worried, saying that we might see higher inflation later this year as a result of pent-up demand, but that most of the increase would be just temporary. 

According to Powell, Fed officials project that it could take nearly three years for inflation to sustainably rise to their target levels.

Noticeable Mortgage Rate Growth

It was a relatively quiet week for mortgage markets overall. The key labor market data caused some volatility, but its lasting impact was relatively minor, and rates ended the week a little higher.

Extremely strong economic reports were negative for mortgage markets this week. With the rollout of the COVID-19 vaccine gaining steam and additional government stimulus on the way, most investors expect that future data will be even more impressive. As a result, mortgage rates ended the week at their highest levels in months. 

Mortgage rates have been on an upward path this year, and the trend continued this week. With the rollout of the COVID-19 vaccine and additional government stimulus on the way, most investors expect to see a surge in economic activity. As a result, mortgage rates ended the week at their highest levels in months. 

Home Sales Continue to Surge; Inventory a Continued Obstacle

The spectacular rebound in the housing sector from such a weak state during the spring has continued. In January, Existing Home Sales unexpectedly increased from December. There were also 24% higher than a year ago. This result is near the best level since 2006. The median existing-home price was 14% higher than a year ago. 

Inventory levels, however, were down 26% from a year ago and have remained the primary obstacle to even stronger sales activity. The number of homes for sale was at just a 1.9-month supply nationally. This is well below the 6.0-month supply. Consensus considers 6.0 a healthy balance between home buyers and home sellers.  

COVID-19 Continues to Slow Job Growth

The highly anticipated monthly Employment report contained mixed news, but it is clear that the spread of the coronavirus has slowed the pace of labor market improvement in recent months. In January, the economy gained 49,000 jobs, which was awfully close to expectations. However, further revisions subtracted 159,000 jobs from the results for prior months. The hospitality sector saw particularly hard job losses.

The biggest surprise was the sharp drop in the unemployment rate to 6.3%, far below the consensus forecast of 6.7%. The decline was due to both hiring gains (a sign of strength) and the departure of 406,000 workers from the labor force (a relative sign of weakness). 

The data on job gains comes from actual figures provided by large companies, while the unemployment rate is based on a household survey conducted by the Labor Department. Although these two sources show similar results in the long run, it is common for them to display different levels of strength from month to month.

A couple of other significant economic reports released this week from the Institute of Supply Management (ISM) suggested that job gains may improve in the coming months. The ISM national services index unexpectedly rose to 58.7, the highest level in about two years. 

The ISM national manufacturing index fell to 58.7 in January, just a little below December’s reading which was the best since August 2018. Levels above 50 indicate that the sectors are expanding.

Fed Chair Powell said that Fed policy will remain accommodative until substantial progress is made in reaching full employment. According to Powell, the unemployment rate by some measures is closer to 10% than to the 6.3% reading seen in the latest Employment report.

COVID Relief Sparking Mortgage Rate Growth

While there is broad agreement that the government should provide more assistance to individuals and businesses harmed by the pandemic, lawmakers continued to negotiate the details up until recently when the house and senate both approved President Biden’s proposed $1.9 trillion package. The deal will provide $1400 stimulus checks to Americans along with unemployment relief, rent aid, and continued help for small businesses.

For mortgage rates, increased government spending has a negative effect. This is because the government must issue additional Treasury bonds to fund the spending. In turn, this causes a rise in yields, including mortgage rates.

Bond yields have gone up rapidly this year mostly due to an improving outlook for economic growth, which increases inflationary pressures. Both the government and the Fed are providing massive amounts of stimulus to boost the economy. Economists anticipate the vaccine rollout to unleash enormous pent-up demand in hard-hit areas, such as travel. In addition, the Treasury must issue bonds to fund the extra government spending, and this added supply causes yields to rise.  

$1.9 Trillion COVID Relief Plan Details

President Joe Biden signed the newly approved $1.9 trillion relief plan. This gives additional benefits and relief to millions of Americans. Here are a few of the highlights from the plan:

  • Extension of $300 per week jobless aid and additional programs making more people eligible for unemployment insurance until September 6th. In addition, the newly approved plan makes a person’s first $10,200 in jobless benefits tax-free.
  • $1,400 direct payments to Americans who make less than $75-$85,000 if filing individually and less than $150-$170,000 for those filing jointly. The government will base eligibility on Americans’ most recently filed tax return.
  • There is a one-year extension on the child tax credit. It will increase to $3,600 for children under 6 and to $3,000 for kids between 6 and 17.
  • The plan injects $20 billion into Covid-19 vaccine manufacturing and distribution and roughly $50 billion into testing and contact tracing.
  • $25 billion in additional rental and utility assistance and about $10 billion for mortgage aid.
  • More than $120 billion is directed towards K-12 schools.
  • The Supplemental Nutrition Assistance Program benefits are increased by 15% through September.
  • The bill also includes an expansion of subsidies and other provisions to help Americans find and afford health insurance.
  • It offers nearly $30 billion in aid to restaurants.
  • The legislation expands on an existing employee retention tax credit, which is designed so companies keep workers on the payroll.

Retail Sales Expected to Grow

Since consumer spending accounts for over two-thirds of all economic activity in the United States, the retail sales data is a key indicator of growth. Following three straight months of declines, sales jumped sharply in the latest report, boosted by the $600 stimulus payments distributed to millions of people. 

In January, retail sales increased a massive 5.3% from December, far above the consensus forecast of 1.2%. 

Economic analysts expect retail sales to grow up to 8.2% this year ($4.33 trillion in sales). This prediction is based on the economy reopens across the country and more people getting the vaccine. Many states have already begun to lift COVID procedures state-wide.

Digital Retail Continues to Thrive

According to the National Retail Federation (NRF), digital retail sales have continued to rise, growing 22% over last year’s numbers. The NRF is predicting that e-commerce sales will continue to grow an additional 23% as we get later into 2021.

Increased vaccine numbers have shown that Americans are becoming more comfortable spending money on travel again and that more Americans will spend again on services which account for up to 70% of consumer spending.


With the COVID-19 vaccine becoming more readily available to more Americans, economic experts are beginning to piece together the 2021 economic roadmap as Americans look forward to returning to normal life and normal spending as we head into the summer.

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