Low Inflation

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Low inflation and rising tensions with North Korea were good for mortgage rates this week, while strong labor market data was negative. The net effect was that mortgage rates ended the week a little lower, near the best levels of the year.

Fed officials are hoping for inflation to rise, but the recent data has not cooperated. On Friday, the core consumer price index (CPI), a widely followed indicator, revealed that inflation in July was just 1.7% higher than a year ago, which was the same annual rate as last month. Just a few months ago, the annual rate was 2.2%.

The recent trend in inflation has been good for mortgage rates, and it could slow the pace of monetary tightening by the Fed. Earlier in the week, the Fed’s Evans said that December is the earliest that the Fed should consider another federal funds rate hike and that if inflation remains weak they could put off another rate hike “until later.”

Concerns about the threat posed by North Korea increased this week. Investors reacted by shifting from riskier assets such as stocks to relatively safer assets such as bonds. Mortgage-backed securities (MBS) were one beneficiary of this flight to safety. The added demand raised MBS prices, which was good for mortgage rates.

Tuesday’s JOLTS report revealed job openings and labor turnover rates for June. While labor turnover rates were little changed, job openings unexpectedly surged to 6.2 million, which was a record high. A greater number of unfilled positions is viewed as a sign of strength for the labor market, so this data was good news for the economy. Stronger economic activity raises expectations for future inflation, however, so this report was negative for mortgage rates.

Looking ahead, Retail Sales will be released on Tuesday. Consumer spending accounts for about 70% of economic activity in the U.S., and the retail sales data is a key indicator. Housing Starts will come out on Wednesday. Industrial Production, an important indicator of economic activity, will be released on Thursday. In addition, the Minutes from the July 25 European Central Bank Meeting will come out on Thursday and could influence U.S. markets. News about North Korea could affect mortgage rates as well.

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