Consumer Borrowing Costs Pressured Higher

After what seems like weeks of winning days, interest rates finally took a step back yesterday. There was no specific reason as the economic data was bond friendly…many more people filed for unemployment benefits than expected. Basically came down to more sellers than buyers. All lenders did reprice worse increasing consumer borrowing costs by .25 to .375 in discount. Meaning if a rate was costing 1 point Thursday morning, by the end of the day it was costing 1.375 points.

Our week ends with a busy day of economic data.

The first report to be released was Retail Sales. This data reports on the monthly change in total sales receipts taken in at retail stores. Higher retail sales benefits corporate profits and the stock market while interest rates benefit with declining sales. The data released today covered consumer spending in July. Retail sales have fallen in the last two months with June posting a 0.5% decline and May posting a even larger 1.1% dip. Economists surveyed prior to today’s data expected total retail sales to have increased 0.5% last month but when excluding auto sales only a 0.3% increase.

The release showed retail sales rose last month, but less than expectations. Overall retail sales posted a 0.4% increase and when excluding transportations orders they rose 0.2%. June’s number was revised better to show only a 0.3% decline in overall sales. The boost in July’s sales was led by a 1.6% increase in auto sales and a 2.3% increase in gasoline stations sales.

Released at the same time was a reading on inflation with the Consumer Price Index. The CPI measures price changes (inflation or deflation) on a fixed basket of goods and services that consumers purchase. Inflation is a high ranking enemy of interest rates. The Federal Reserve has stated over and over that inflation is not a concern and today's release supports that theory. Overall consumer prices rose 0.3% in July following a 0.1% decline in June. This was the first monthly increase in consumer prices in 4 months. When stripping out the more volatile categories, food and energy, consumer prices rose 0.1% vs. a 0.2% increase in June. Year over year, overall CPI is up 1.3% while the core rate is only up 1.0%. Despite the higher than expected increase to overall consumer prices, today’s report continues to show inflation to be in check and of no immediate concern.

Our final release of the week gives us a look at how you the consumer is feeling… Consumer Sentiment. The Reuter’s/University of Michigan’s Consumer Center surveys 500 households on their attitudes on the economy and personal financial status. Market participants track consumer attitudes to gauge future economic momentum. An optimistic consumer is more likely to spend, this benefits stock markets. A pessimistic consumer is more likely to save, which supports low yields in the bond market. Low yields in the bond market allow lenders to keep mortgage rates low. The report indicated consumers are slightly more optimistic than expected with the mid month August reading coming in at 69.6. Despite the uptick in sentiment, it is still well below June’s 76.0 reading.

Lender rate sheets are worse this morning. The par 30 year conventional rate mortgage is in the 4.25% to 4.50% range for well qualified consumers. The lenders offering 4.125% yesterday are no longer doing so, unless you wish to pay additional costs to buy down the rate. If you are seeking a 15 year term, the par rate is holding in the 3.75% to 4.00% range.

Have a great weekend and be back to you on Monday.