Oil Prices Surge

The conflict with Iran outweighed the major economic data this week. Surging oil prices raised the outlook for future inflation, so mortgage rates ended the week higher. 

Geopolitical events such as the conflict with Iran affect mortgage rates in multiple ways. The most common reaction is that investors shift assets from risky assets such as stocks to relatively safer assets such as bonds, which is positive for mortgage rates. However, oil prices have risen sharply this week due to the conflict. This increases future inflationary pressures, which is negative. In addition, military spending may increase, and the government may need to issue more bonds to fund the deficit. An increase in supply would cause yields to rise. 

In contrast to the labor market data, two significant economic reports released this week from the Institute of Supply Management revealed stronger than expected results. The ISM national services sector index jumped to 56.1, far above the consensus forecast of 53.5 and the highest level since July 2022. The ISM national manufacturing sector index was 52.4, above the consensus forecast of 52.0. Readings above 50 indicate an expansion in the sectors and below 50 a contraction. While tariff policies may change after the recent Supreme Court decision, the higher tariffs on foreign goods imposed last year may be providing a lift to domestic manufacturing companies and helping them close the performance gap with services.

Consumer spending accounts for over two-thirds of U.S. economic activity, so the monthly Retail Sales report is a key measure of the health of the economy. Delayed by the government shutdown, the most recent data revealed that retail sales in January fell 0.3% from December, which was close to expectations. 

Looking ahead, attention will remain fixed on the conflict with Iran. Investors also will monitor comments from government officials about tariffs and from Fed officials for hints about future monetary policy. For economic data, two big inflation reports will be released in the same week due to disruptions from the government shutdown. The Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will come out on Wednesday. The PCE price index, the inflation indicator favored by the Fed, will be released on Friday. In addition, Existing Home Sales will come out on Tuesday.