Consumer Spending Rises
Consumer spending remained strong in September, with retail sales increasing by 0.4%, exceeding forecasts and reflecting a resilient economy. Excluding autos, sales rose by 0.5%, with gains in clothing, restaurants, and miscellaneous stores offsetting declines in gas stations, electronics, and furniture. Meanwhile, initial unemployment claims fell by 19,000 to 241,000 despite recent hurricanes, indicating a stable labor market. The data aligns with the Federal Reserve's recent interest rate cuts, signaling confidence in inflation control while acknowledging concerns about potential labor market softening.
U.K. Inflation Sees Sharp Drop
Inflation in the U.K. dropped to 1.7% in September, lower than expected, raising market expectations for a potential Bank of England (BOE) rate cut in November. Core inflation, excluding volatile items like energy and food, also fell to 3.2%, while services inflation hit its lowest rate since May 2022. This inflation data, combined with lower wage growth, increased the likelihood of a 25-basis-point rate cut by the BOE, with a potential for another cut in December. The British pound and gilt yields dropped following the report, signaling dovish market sentiment.
Mortgage Rates Rise – Demand Falls
Despite the recent interest rate cut, mortgage interest rates rose for the third straight week, leading to a 17% drop in total mortgage applications. The likely reason is mortgage rates priced in more than one rate cut but have now adjusted for the lone 0.50% cut. Refinance demand fell 26%, though it remains 111% higher than last year, as rates were significantly higher then. Mortgage applications for home purchases declined 7% but were still 7% above last year due to improved housing inventory. Despite the rate hikes, first-time buyers are staying in the market, with some delaying purchases until after the November election for economic clarity.