“What are rates going to do tomorrow?” That was, and perhaps still is, the classic question asked by a loan originator of their secondary marketing staff. It is usually asked ahead of Non-Farm Payroll Friday, or the meeting of the Fed. Usually Capital Markets staffs wiggle their way through some kind of answer, although everyone involved knows that no one knows what rates are going to do for sure.
But Capital Markets staffs know what the general trends are, especially over the last week or so. Thus they know that while overseas events (especially in Russia, China, or Europe) can overrule U.S. economic news, the trend here in the U.S. is toward higher rates. And after a couple of months of disappointing economic data, indicators for March have begun to reflect more robust rates of economic activity. So although rates are not going to skyrocket, there is a general feeling that they are going to slip higher.
Retail Sales posted a sizable 1.1 percent jump for the month, while housing starts and industrial production both posted positive gains in March. Analysts’ expectations since the year began were for more solid GDP growth beginning in the second quarter after the severe effects of weather and a slower pace of inventory building weighed on growth in the first quarter. So although some believe that first-quarter GDP growth will come in around 0.4 percent, it will then accelerate to 2.8 percent in the second quarter.
As mentioned, Retail Sales for March rose a strong 1.1 percent, and the increase was relatively broad based. It was driven in part by a sizable jump in automobile sales (no pun intended). Other sectors contributing to the stronger March sales figures were furniture, building materials, general merchandise, non-store retailers and eating and drinking places. The stronger sales figures for March and the upward revision to February’s reading reinforce the idea that weather effects were the primary culprit behind the slowdown in consumer spending. For those who love nitty-gritty details, the control group within retail sales, which feeds into the calculation of GDP, rose 0.8 percent in March following a 0.4 percent reading in February. Some believe that these stronger “control group” numbers are consistent with the view for 2.1 percent annualized growth in real consumer spending in the first quarter.
Also on the consumer front, March consumer prices rose slightly more than expected, climbing 0.2 percent as food and shelter prices edged higher for the month. The CPI is now up 1.5 percent on a year-over-year basis. With import prices, producer prices and the CPI all edging higher, there now appears to be some upside risks to the inflation outlook throughout the remainder of this year. Industrial Production jumped .7 percent, adding to the thinking that the economy is doing pretty well.
But March housing starts rose 2.8 percent, less than expected, to a 946,000-unit pace while February’s starts were revised higher. The housing starts report last week confirmed suspicions that home construction activity was negatively affected by the winter weather and now appears to be poised for a pick up as the spring progresses. Single-family starts drove the increase in the headline reading for the month, rising 6.0 percent. Forward-looking building permits fell 2.4 percent following a sharp 7.3 percent rise in February. Even with a drop in permitting activity, many continue to expect home building to accelerate in the coming months with housing starts averaging around 1.07 million for the year.
LOs are often looking for economic data to nudge fence-sitters to lock in a loan for a purchase or refi. And last week gave those LOs enough ammo to do just that. But as mentioned, no one has a crystal ball. But put another way, there is little reason to think that rates will head much lower.