Mortgage Interest Rates Ended the Week Higher

Mortgage bond prices fell last week pushing mortgage interest rates higher.  Trading was volatile but most of the negative movement occurred the latter portion of the week.  Traders remained concerned about inflation, which erodes the value of bonds.  Philadelphia Fed President Plosser did very little to alleviate those concerns by stating that core inflation would remain elevated despite slower economic growth. 

For the week, interest rates on government and conventional loans rose by about 3/8 of a discount point.

The retail sales data Wednesday will be the most important ever next week.  Retail sales data is the first indication of weakness or strength in consumer spending released each month.  The bureau of the Census of the US Department of Commerce provides information on how much the consumer spends on the purchase of goods.  This data provides the consumption part of the gross domestic product.  Retail sales data represents merchandise sold for cash or credit by retailers.  Durable goods, such as autos, make up 35% of the figure.  The balance consists of non-durables such as gasoline, restaurants, and general merchandise.

There are several drawbacks to the report.  The data covers purchases of goods only, not services.  It is also not adjusted for inflation and is extremely volatile.

Economists are concerned that the current economic uncertainty will continue to curtail consumer spending habits.  Consumers have generally been given credit for sustaining the economy despite rising energy prices and home price declines.

While Philadelphia Fed President Plosser coutioned last week about predicting the future of the economy based on one piece of data, the retail sales report is likely to cause mortgage interest rate volatility.  The data will be a vital component in determining future Fed actions.  Plosser was clear that the Fed remains concerned about inflation despite the recent rate decreases.  He warned that the Fed needs to be "particularly alert" about rising inflations expectations.  Inflation, real or perceived, is bad for bonds.  If the fear of inflation increases, mortgage interest rates could trend higher.  Be cautious.  Home interest rates remain favorable but lower future rates are not a given.