Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

FOOD FOR THE FED: SOLID RETAIL AND PENDING HOME SALES, STUBBORNLY HIGH MORTGAGE RATES

Investors were treated to a pre-Fed post-war spate of economic data on Wednesday that suggested consumers are shrugging off uncertainties and opening their wallets, while slightly contradictory housing and mortgage numbers painted a picture of a challenged sector trying to turn the corner amid the crosscurrents of high borrowing costs and pent-up demand.

Receipts at U.S. retailers USRSL=ECI increased by 0.9% in May, stronger than the 0.5% growth analysts expected, more than compensating for April's downwardly revised 0.4% gain.

Diving below the surface, the 3.4% jump at the gas pump, due to war-related price pressures, gave the headline some upside muscle. Yet, excluding gasoline, retail sales rose by 0.7%, still stronger than economists' headline projection. Motor vehicles/parts, home furnishings, and non-store retail (which includes online shopping) all posted robust gains north of 1%. A modest 0.1% dip in food/drink services could hint at some spending restraint amid Middle East tensions and their inflationary effects.

"The stronger-than-forecast and broad-based gains in May retail sales show that consumers continued to spend strongly despite higher gasoline prices in the month,” says Kathy Bostjancic, chief economist at Nationwide. “The large tax refunds and overall tax reductions for households this year and the recent strengthening in employment growth helped buffer the negative drag from higher gasoline prices."

The "control" figure, which excludes autos, gasoline, building supplies and food services -- and is most closely correlated with the personal expenditures element of GDP -- grew by 0.7%, breezing past the 0.4% consensus.

With retail sales growth outpacing last week's 0.5% CPI print for May, the stronger-than-expected report can't be entirely chalked up to inflation.

Turning to the housing market, signed contracts for the pending sales of pre-owned U.S. homes USNAR=ECI increased by 3.8% last month, according to the National Association of Realtors (NAR), skipping blithely past the 0.8% rate economists projected.

Still, a party pooper might point out that April's previously stated 1.4% gain was slashed to 0.3%.

Even so, the outsized monthly spurt is welcome news for a sector that's long been groaning under the weight of elevated borrowing rates, rising materials costs and low inventories.

"A late spring buyer rush—even with mortgage rates not budging—is an indication of pent-up housing demand and consumers’ acceptance of above-6% mortgage rates as the new normal,” says Lawrence Yun, NAR's chief economist.

That sounds nice, but as shown by the graphic below, the pending home sales index has yet to claw its way back to pre-pandemic levels.

"Transactions have been running below their steady state for the last three years, developing a backlog of people who would like to move or purchase their first home, if financial circumstances allowed," writes Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

While we're on the subject, the cost of financing home loans held firm last week, according to the Mortgage Bankers Association (MBA).

Would-be borrowers were unanimously unimpressed.

The average 30-year fixed contract rate USMG=ECI—which tends to rise and fall in tandem with benchmark Treasury yields—refused to budge from the previous week's 6.60%.

That was not good enough. Demand for loans to purchase homes USMGPI=ECI—another leading housing indicator—soured by 3.4%, and refi applications USMGR=ECI slipped 4.5%.

Taken together, total mortgage demand softened by 3.8%.

"Last week’s CPI data showed that inflation continued to move higher, putting upward pressure on rates early in the week, but growing optimism regarding the opening of the Strait of Hormuz brought rates down again by the end of the week,” writes MBA's Chief Economist Mike Fratantoni.

The 30-year fixed rate currently sits 24 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have increased by 3.0%, while refi demand has risen by 22.6%.

And finally, a relic from ancient times shows business inventories USBINV=ECI grew by 0.5% in April, sticking the consensus landing.

(Stephen Culp)

*****

EARLIER ON LIVE MARKETS:

US STOCKS CHOP AROUND AHEAD OF WARSH'S FIRST FED DECISION CLICK HERE

BENCHMARK TREASURY YIELD STEADIES AHEAD OF FED, BIGGER MOVE STILL BREWING CLICK HERE

NO QUICK FIX FOR IT SERVICES' AI HEADACHE CLICK HERE

BOE RATE HIKES? WHAT FOR? CLICK HERE

TECH NOW ACCOUNTS FOR 20% OF GLOBAL EQUITY POSITIONING, BNY SAYS CLICK HERE

STEADY ON (CLICK HERE)

EUROPE BEFORE THE BELL: TAKING STOCK (CLICK HERE)

ALL EYES ON HOW WARSH WALKS THE LINE (CLICK HERE)