High inflation has investors mostly taking their cue from the Fed during a very light week for economic data. The message from officials was loud and clear. More work needs to be done to bring down inflation, meaning tighter monetary policy. As a result, mortgage rates ended the week higher.
High Inflation Not Helped By Employment Report
On Tuesday Fed Chair Powell emphasized that bringing down inflation may take longer than originally thought. Due to the exceptional strength of the labor market, there will be more rate hikes which many investors have been anticipating.
The job gains in the latest Employment report that blew away even the highest forecasts of economists. According to Powell, it shows why returning inflation to the Fed’s annual target rate of 2.0% may be a “process that takes a significant period of time.” Powell also repeated that incoming data will determine monetary policy. The amount of tightening could be adjusted in either direction based on future economic reports.
Low Unemployment Makes for High Inflation
In addition to the Employment data, another reason for the caution displayed by Fed officials has been the strength of recent reports on jobless claims. The Department of Labor releases the total number of new claims for unemployment insurance each week. The latest reading was just 196,000. So far this year, claims have averaged just 195,000 per week. This is even lower than the 220,000 per week seen in 2019. By historical standards, 2019 was a very tight labor market. Under different circumstances this would be seen as great news, but due to high inflation overall emotions are mixed.
Latest data from the Mortgage Bankers Association (MBA), mortgage application volumes have finally shown some signs of life. Recently mortgage applications were at the smallest levels in 25 years. Purchase applications rose moderately, by 3%, but are still down 37% from last year at this time. Applications to refinance jumped 18% from the prior week, but remain down a massive 75% from one year ago.
Looking Ahead to the CPI
Investors will be closely watching to see if Fed officials elaborate on their plans for future rate hikes. On Tuesday the most anticipated economic report of the week, the Consumer Price Index (CPI). CPI looks at the price changes for a broad range of goods and services, and a widely flowed inflation indicator.
Retail Sales comes out on Wednesday. Consumer spending accounts for over two-thirds of the United States’ economic activity. Thus, the retail sales data is a key measure of the health of the economy.
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