Retail Sales Below Target

Weaker than expected Retail Sales data helped mortgage rates last week. Soothing comments from Fed Chief Bernanke also were a positive influence, and mortgage rates ended the week lower.

The monthly Retail Sales report measures spending by consumers, which accounts for about 70% of economic activity. Monday's report revealed that Retail Sales were higher in June than in May, but the increase was much smaller than expected. The shortfall caused economists to lower their forecasts for second quarter GDP. When economic growth indicators are below the consensus forecast, future inflation expectations are reduced, and this is favorable for mortgage rates. As has often been the case in recent months, the reaction in mortgage rates was magnified somewhat by the importance of incoming data on future Fed policy.

On Wednesday and Thursday, Bernanke answered questions before Congress in the regularly scheduled semi-annual testimony. Overall, there were no significant surprises in Bernanke's comments, but his tone was a bit more dovish than in previous communications, which helped mortgage rates. He emphasized that the Fed's bond purchases are not on a "preset course", but rather will depend on future economic data. While his comments caused investors to push back their expectations for when the Fed will begin to taper its bond purchases, the comments also added to the uncertainty about the timing, which means that mortgage rates likely will remain very volatile in coming months.