Core Inflation Climbs

Raleigh Mortgage Group Uncategorized

There was little good news to be found for mortgage rates this week. Investors continued to favor stocks over bonds, the core inflation data was stronger than expected, and it was reported that China might scale back its purchases of U.S. bonds. As a result, mortgage rates ended the week higher.

Investors have started the year very optimistic about the prospects for economic growth in the U.S. and globally. The Dow posted strong gains of about 400 points this week, reaching a record high. However, some of the assets entering the stock market were taken out of the bond markets, including mortgage-backed securities (MBS). The reduced demand for MBS was negative for mortgage rates.

Low levels of inflation have helped keep mortgage rates down in recent years, so it was bad news on Friday when the core Consumer Price Index (CPI) revealed a larger than expected increase in December. Core CPI, which excludes the volatile food and energy components, rose 0.3% from November, above the consensus for an increase of just 0.2%.

Core CPI was 1.8% higher than a year ago, up from an annual rate of 1.7% last month. If core inflation continues to rise, the Fed will be more likely to increase the federal funds rate at a faster pace.

On Wednesday, a report was released which said that China was considering scaling back or stopping its purchases of U.S. bonds in response to trade tensions with the U.S. The potential for reduced demand for bonds pushed yields higher. Chinese officials later denied that the report was true, though, and the net effect was small.

Looking ahead, Industrial Production, an important indicator of economic activity, and the NAHB housing index will be released on Wednesday. Housing Starts will come out on Thursday. Consumer Sentiment will be released on Friday. Mortgage markets will be closed on Monday in observance of Martin Luther King Day.

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