"The main influence on mortgage rates last week was inflation concerns. A surprising jump in the Consumer Price Index (CPI) caused mortgage rates to rise on Tuesday. However, the Fed downplayed the threat of high inflation on Wednesday causing mortgage rates to decline. The net result was that mortgage rates finished the week a little lower.
The May 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 was the prices paid component of the Philly Fed report, also showing a sharp increase. Since expectations for future inflation are a primary factor in setting mortgage rates, this data was unfavorable for rates.
The good news is 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, and this will be an important area to watch in coming months.
Remember the old rule of thumb, good news for the economy equals bad news for mortgage rates.
**As of this morning, the existing home sales figures are out. The month of May we had 4.89M versus an estimate of 4.73M, plus April sales were revised upwards. Due to this, the mortgage backed securities market is losing some pricing, and it is possible rates will slightly worsen later today.**"
Stuart can be reached at 480.776.2954