After rising steadily for months, mortgage rates paused this week and then moved a little lower. The major inflation data was roughly in line with the expected levels, and the modest decline in the annual rate was enough for mortgage rates to stabilize, at least temporarily.
The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In April, Core CPI was 6.2% higher than a year ago, down from an annual rate of increase of 6.5% last month (the highest level since 1982), but still far above the readings around 2.0% seen early in 2021.
As the economy has steadily recovered from the pandemic, strong consumer demand, supply constraints, and surging commodity prices have pushed prices much higher for a wide range of goods and services. The conflict in Ukraine and the recent shutdowns in China due to Covid have worsened shortages for many key items. Over time, supply chain disruptions will ease, and Fed tightening will reduce inflationary pressures, but it is not clear how quickly this will occur.
Higher mortgage rates have taken a large toll on mortgage application volumes this year. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates are over 2.0% higher than a year ago. Although purchase applications climbed slightly from last week, they are down 8% from last year at this time, and applications to refinance a loan have plunged a shocking 72% from one year ago. The MBA now forecasts that total mortgage originations this year will be 35% lower than last year due to the massive decline in refinancing’s.
Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. They will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, Retail Sales will come out on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of the health of the economy. Housing Starts will be released on Wednesday and Existing Home Sales on Thursday.
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