Strong Consumer Spending

Over the past week, inflation data that overall was a bit weaker than expected offset stronger than expected consumer spending, and mortgage rates ended slightly lower.

Economists had anticipated that the end of supplemental unemployment benefits for many people and a lack of inventory for some products would lead to a drop in consumer spending in September. Instead, retail sales jumped 0.7% from August, far above the consensus forecast for a decline of 0.2%, and were an impressive 14% higher than a year ago at this time.

A tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions are some of the main factors that have caused inflation to increase in recent months to the highest levels since 1991. The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In September, Core CPI, which excludes the volatile food and energy components, was 4.0% higher than a year ago, the same annual rate of increase as last month, but well above levels below 2.0% seen earlier in the year. Fed officials and economists are divided about whether the recent spike in the annual inflation rate is mostly due to temporary factors caused by the pandemic or will last for a long time.

The minutes from the September 22 Fed meeting released on Wednesday provided greater detail about the anticipated plans for tapering (scaling back) the massive bond purchase program which was initiated near the start of the pandemic to help the economy recover. The Fed currently buys $120 billion per month of Treasuries and mortgage-backed securities (MBS). According to the minutes, this will be reduced by $15 billion per month beginning in November or December, which would conclude the program during the middle of 2022. This closely matched investor expectations.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, it will be a light week for economic data with a focus on the housing sector. Housing Starts will be released on Tuesday and Existing Home Sales on Thursday.