Economic Commentary for January 15th, 2015: Retail Sales Disappoint


The economic data released over the past week was well received by bond investors. Retail Sales declined and wage inflation remained low. As a result, mortgage rates moved a little lower.

While the consensus forecast was for a slight decline in Retail Sales in December, the actual results showed a drop of 0.9% from November. Retail Sales account for roughly 70% of economic activity, so investors watch this report closely. It can be volatile month to month, though, so investors often look at averages over longer periods. During the fourth quarter of 2014, Retail Sales were a very solid 4.1% higher than during the fourth quarter of 2013. In short, mortgage rates moved lower following the disappointing December Retail Sales Report, but few economists think that it marked the start of a negative trend.

Other sectors of the economy, particularly the labor market, provided a much stronger signal. The Employment Report released on Friday showed that the economy added more jobs than expected in December at 252K. In 2014, 2.9 million jobs were added, which was the highest number since 1999. The Unemployment Rate fell from 5.8% to 5.6%, the lowest level since June 2008. For mortgage rates, though, the strong job gains were more than offset by wages that were just 1.7% higher than one year ago. Fed officials would like to see wage growth of 3.0% to 4.0% which was typical during past economic recoveries. Low wage growth reduces future inflationary pressures, however, so it was positive for mortgage rates.

The biggest upcoming economic event will be the European Central Bank (ECB) meeting on January 22. Expectations that the ECB will begin to purchase sovereign bonds have pushed bond yields lower around the world, and this meeting likely will move global markets. After that, the Greek election on January 25 also will be a focus for investors. In the U.S., the Consumer Price Index (CPI), the most closely watched monthly inflation data, will be released on January 16.