As the U.S. returns to “normalcy”, analysts see strong inflation data while the economy reopens. Job openings hit record highs. The housing market continues to grow. More Americans are getting their COVID-19 vaccinations. And inflation shows renewed intrigue. But most importantly, investors observe how each of these components affect mortgage-backed securities.
Analysts See Strong Inflation Data While the Economy Gains Jobs
April’s release of labor market and manufacturing data proved stronger than expected. While the stronger than expected return contributed to analysts seeing strong inflation data, mortgage rates barely changed.
The highly anticipated monthly employment report revealed very impressive results. In March 2021, the economy gained 916,000 jobs. Overall, this rose far above the consensus forecast of 625,000. In addition, analysts supplied added 156,000 jobs to prior month results.
In particular, the hospitality and construction sectors displayed strength. This is especially interesting because both of these sectors suffered blowbacks during the pandemic.
Average Hourly Earnings
Average hourly earnings, an indicator of wage growth, fell slightly from February. Thus, the result did not reach the consensus, but saw a modest increase. Compared to 2020, average hourly earnings jumped 4.2% higher than a year ago. However, average hourly earnings dropped 5.2% compared to February results.
When examining the job growth, it is apparent that most of the unexpected job creation generated in lower paying sectors. This actually led to an overall decline in wage growth.
Unemployment & Job Openings
Meanwhile, the unemployment rate dropped from 6.2% to 6.0%. As a result, this matched analyst expectations. The key employment data revealed that companies are hiring back previously laid off workers. Also, this “rehiring” is occurring at a quicker pace than anticipated. In fact, the JOLTS report pointed to exceptional strength in the labor market.
At the end of February 2021, job openings jumped to 7.4 million. Because of this, job openings came in well above the consensus forecast. This statistic also represents the most job openings since January 2019. Unfilled positions reflect increased demand for more workers. Analysts and investors view this as a sign of tightness in the labor market.
The most significant economic report exceeded expectations by a considerable amount. The ISM national services index jumped from 55 to 64. This skyrocketed far above the consensus forecast of 59. It is also the highest level ever recorded.
In general, the service sector accounts for more than 75% of U.S. economic activity. Thus, readings above 50 indicate that it is expanding.
Unemployment Insurance Claims
Finally, the Department of Labor released the total number of new claims for unemployment insurance each week. The latest reading showed 547,000, the lowest level in over a year. This plummeted significantly from the inflated figures seen during the early months of the pandemic.
Having said that, the latest unemployment insurance claims data still hovers well above 2019 numbers. Throughout 2019, Typical readings fell around 250,000. As the economy reopens, jobless claims should continue their decline.
States Begin Cutting Off Pandemic Unemployment Benefits as Analysts See Strong Inflation Data
Indiana, Texas, and Oklahoma have joined a group of states, which have begun ending pandemic-era unemployment benefits. States issued these benefits in addition to standard benefits. Thus, many states are eliminating the weekly $300 supplement. This supplement helped unemployed Americans received over the course of the last year.
The roster of states ending pandemic unemployment benefits is quite extensive. Currently, it includes the following:
- North Dakota
- South Carolina
- South Dakota
- West Virgina
Each of these states plan to end the added benefits at the beginning of June or early in the month of July. States claim that these additional benefits have kept people from applying to jobs.
However, the evidence shows that COVID-19 is the real concern. Countless Americas fear infection.. As such, this fear drives many to stay at home.
Consumer Confidence and Spending Spur Economic Growth Alongside Analysts Seeing Strong Inflation
As previously mentioned, the labor market and manufacturing sector saw good news. It is no surprise that U.S. Consumer Confidence increased to the highest level since the beginning of the pandemic. This is greatly contributing to market analysts seeing strong inflation data, as the two often go hand-in-hand.
This index from the Conference Board jumped from 90.4 in February to 109.7 in March. In conclusion, consumer confidence far exceeded the consensus forecast. The current consumer confidence reading also takes the top spot in the past year.
There are a few key factors receiving credit for the enhanced consumer confidence:
- The COVID-19 vaccine rollout
- The reopening economy
- The stimulus check distribution
These factors fuel optimism in the American economy going forward.
With the increased delivery of the vaccine and the distribution of stimulus checks, investors anticipate large economic growth in 2021. Due to this, the outlook for future inflation increased. Rising inflation similarly led to a sharp increase in mortgage rates from 2020’s record-low levels.
Both growth and inflation data showed stronger-than-predicted levels nearly across the board. In spite of this, investors actually expected even better growth figures. The failed expectation contributed to mortgage rates lowering slightly.
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the first quarter, GDP rose at an annualized rate of 6.4%. This result nearly met the consensus forecast. Also, the latest GDP reading achieved the second-best reading since 2003. It only fell behind 2020’s third quarter, when the economy started reopening efforts.
Consumer Spending Grows Driving Analysts to See Strong Inflation Data
Overall, consumer spending exhibited particular strength. The vaccine rollout and stimulus check distribution boosted consumer spending. Analysts expect to see strong inflation data for the foreseeable future.
In February, severe many regions faced severe weather. The severe weather negatively consumer spending. On the other hand, March 2021 consumer spending data revealed exceptional strength.
In March, retail sales jumped an amazing 9.8% from February. Retail sales soared above the consensus forecast of 6.0%.
As it turns out, the reopening economy led to the strongest gains in previously hurt areas. These include restaurants, clothing, and sporting goods.
Growth in Manufacturing
The closely watched manufacturing data showed unanticipated strength. The ISM national manufacturing index jumped to 64.7. At 64.7, manufacturing soared well above the consensus forecast of 61.5. It also reached the highest level since 1983. Readings above 50 indicate an expansion in the sector, which accounts for roughly 12% of the economy.
Existing Home Sales Increase as Analysts See Strong Inflation Data
Investors frequently discuss the housing market and mortgage rates. In recent months, builders scramble to meet renewed demand. Concurrently, existing home sales bounced back from a brief slowdown.
Existing Home Sales Bounce Back
It was a quiet few weeks for mortgage markets. Mixed economic data and a proposed tax increase caused little reaction.
Existing home sales make up about 90% of the market. Last spring’s shutdown stifled them in 2020. As such, existing home sales bounced back at a relatively quick pace. In addition, existing home sales remain at high levels. The pace slowed a bit in February and March.
Again, this can be attributed to the severe weather. That said, some regions also faced a lack of housing inventory and higher mortgage rates.
In March, existing home sales fell 4% from February. Overall, existing home sales remained 12% higher than a year ago. The median existing-home price leapt 17% higher than last year at this time to a new record of $329,100.
Inventory levels plummeted 28% from a year ago. Currently, they remain near the lowest since 1982. The number of homes for sale was at just a 2.1-month supply nationally. As always, analysts consider a 6-month supply to be a healthy balance between buyers and sellers. Due to this, home inventory is well short of that metric.
By contrast, new home sales posted enormous gains. Overall, new home sales account for 10% of the market. In March, new home sales jumped 21% from February to the highest level since 2006. In general, the pace of both new and existing sales is being dictated by the supply of homes available each month.
Housing Market Grows with New Construction
The housing market also benefited from increased economic activity. Builders race to construct desperately needed new homes. In March, housing starts jumped a stronger than expected 19% from February to the fastest pace since 2006. Rising costs for labor and materials push up prices, though.
Analysts See Strong Inflation Data Rising with Economic Reopening
The reduced economic activity resulting from the pandemic caused a large decline in inflation last year. The inflation decline greatly contributed to the record-low mortgage rates. However, this is no longer the case.
The vaccine distribution and economy reopening persist at an incredible pace. Now, investors worry that inflation may be heading much higher. The latest data reinforced this view.
The core PCE price index is the inflation indicator favored by the Fed. In March, core PCE rose 1.8% higher than a year ago. This matched the consensus forecast. That said, core PCE climbed up from an annual rate of increase of just 1.4% last month. Both Fed officials and economists expected increases of this magnitude. Despite this, some feel that this will be a temporary spike. Others believe that the rising inflation will persist for years.
Along with core PCE, investors also refer to the Consumer Price Index (CPI) for inflation data. With CPI, investors see the price change for goods and services. However, CPI excludes the volatile food and energy components. In March, CPI vaulted 2.6% higher than a year ago. CPI was also 1.7% higher than last month. In fact, this is the largest annual rate of increase since August 2018. Higher gas prices majorly led to the increase in CPI.
Thirdly, the Producer Price Index (PPI) examines the price change for raw materials and intermediate goods used to make final products. In March, PPI jumped 1.0% from February. Along with other metrics, this exceeded the consensus forecast. While the consensus forecast was at 0.5%, PPI also improved 4.2% higher from a year prior. This is the highest annual rate of increase since 2011.
In summation, inflation data came in stronger-than-expected nearly across the board. Despite this, mortgage rates ended a little lower.
CDC Lifts and Adjusts Some Restrictions
The CDC announced it was lifting recommendations. These changes apply to mask and social distancing measures for those who have been fully vaccinated. As a result, this inches the American population closer to getting ‘back to normal’. Moreover, many businesses returned to an ideal situation.
As for travel, the CDC says travel is safe for fully vaccinated people. Furthermore, the CDC does not yet recommend unnecessary trips.
Experts Warn Pandemic Not Over Yet
Vaccinations continued to roll out and the CDC relaxed its recommendations. Nevertheless, experts warn that we’re not quite through the woods yet. Lately, infections increased 11%. Experts fear a large spike. Any tentative spike could derail the economic progress made in the last few months.
Fed Meeting Results in No Policy Change Despite Analysts Seeing Strong Inflation Data
The recent Fed meeting contained no surprises. There were not any policy changes. Additionally, the Fed statement appears remarkably similar to the prior one.
Before tightening monetary policy, Fed officials repeated that they would like to see “substantial further progress”. This is directed towards the Fed’s employment and inflation goals. In short, there was no reason for investors to alter their outlook for future Fed actions.
President Biden Introduces Capital Gains Tax Rate Increase
President Biden’s administration announced a proposed increase in the capital gains tax rate. This targets high-earning individuals. Some economists forecast that this could slow economic growth. Because of this, investors viewed the news as slightly positive for mortgage rates.
As vaccine regulations change, political parties continue to butt heads. In whole, investors remain vigilant to the ever-changing economic landscape as we head into the summer months.
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