Julie C. Nichols General

Disappointing Retail Sales
It was a volatile week ahead of the Fed meeting on September 21, but there was little net change in mortgage rates. Shifts in expectations for Fed policy were the main influence on stocks and bonds. A wide range of economic data had little impact.

The last major report on economic activity before the Fed meeting was disappointing. In August, retail sales fell 0.3% from July. Excluding the volatile auto component, retail sales also fell far short of the expected levels with a small decline from July. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator.
After a slow start to the year, retail sales excluding autos picked up nicely and posted solid gains for four months. They have slowed again during the last two months, though, leaving investors and Fed officials wondering what future data will reveal.
The Consumer Price Index (CPI), a widely followed monthly inflation report, revealed higher than expected levels of overall inflation and core inflation. CPI looks at the price change for goods and services which are sold to consumers. Core CPI excludes the volatile food and energy components, which provides a better sense of the underlying trend. Core inflation in August was 2.3% higher than a year ago, up from a 2.2% annual rate last month.
While the weaker than expected retail sales data favors a slower pace of Fed rate hikes, the inflation data supports the opposite, tighter monetary policy. These offsetting influences caused little net change in investor expectations for future Fed policy. Investors see just a small chance that the Fed will raise the federal funds rate at the next meeting on September 21.
Looking ahead, the main event next week will be Wednesday’s Fed meeting. The Fed statement and press conference often cause a large reaction in financial markets. Before that, Housing Starts will be released on Tuesday. Existing Home Sales will come out on Thursday.

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