Mortgage rates fell slightly this week, but remained close to a 23-year high. Stronger than expected retail sales point to a resilient US consumer, but also to the risk of an uptick in consumer price growth. Economic growth continues to defy expectations. While the services sector remains in expansion territory, the manufacturing sector that had been contracting rebounded, and is growing again.
Upside inflation risk, rising government borrowing and dysfunction in the nation’s capital are all pushing bond yields higher. Real interest rates and inflation expectations have moved higher, explaining why mortgage rates will likely stay elevated, at least in the near term.
However, the rapid tightening of financial conditions are expected to cool the pace of economic activity – especially in the most interest-rate sensitive sectors. A big downshift in economic activity would halt the rise in mortgage rates. This week’s Personal Consumption Expenditures release will likely cause another shift in mortgage rates.