Mortgage Rates: Trending Sideways
Inflation Drives Rates
Inflation concerns were the main influence on mortgage rates last week. A surprising jump in CPI caused mortgage rates to rise on Tuesday. The Fed downplayed the threat of high inflation last Wednesday, however, causing mortgage rates to decline. The net result was that mortgage rates finished the week a little lower.
The May Consumer Price Index (CPI), one of the most widely watched inflation indicators, was 2.1% higher than one year ago. Core CPI, which excludes food and energy, was 2.0% higher, up from an annual rate of 1.6% just two months ago. Core CPI has now reached the Fed’s stated target level for core inflation of 2.0%. Another inflation indicator released last week, the Prices Paid component of the Philly Fed report, also showed a sharp increase. Since expectations for future inflation are a primary factor in setting mortgage rates, this data was unfavorable for rates.
However, the impact of the negative news did not last long. While Wednesday’s highly anticipated Fed statement was very similar to the prior one, Fed officials indicated little concern about inflation. Comments from Fed Chair Yellen suggested that current readings reflected normal volatility in monthly inflation data and that the recent uptick did not change the Fed’s long-term forecast. In addition, Fed officials place more weight on a separate monthly inflation report, the Core PCE price index. Core PCE measures a different basket of goods than Core CPI, and Core PCE recently has provided readings a good deal lower than Core CPI. In short, looking at Core PCE, inflation remains well below the Fed’s 2.0% target, giving them comfort in maintaining an accommodative monetary policy. Not all investors are as confident as the Fed that inflation will remain low, though, and this will be an important area to watch in coming months.
Week Ahead
With the current focus on inflation, Thursday’s report on the May Core PCE price index will be significant. Investors also will be watching the housing data this week. Existing Home Sales will be released on Monday and New Home Sales will come out on Tuesday. Durable Orders, an important indicator of economic activity, will be released on Wednesday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Outside the US, the situation in Iraq will remain the primary focus.
Also Notable:
- Philly Fed manufacturing rose to the highest level since September
- NAHB Housing showed a nice increase in home builder confidence
- The S&P 500 stock index reached a record high
- The Fed again cut monthly bond purchases by $10 billion to $35 billion
Damon Germanides