Inflation Higher

Inflation Higher

There was a lot of volatility during the middle of the week, but mortgage rates ended nearly unchanged. Weak manufacturing data offset higher than expected inflation readings. Similarly, increased social unrest in Greece early in the week was balanced by renewed hopes on Friday for a quick solution to Greece’s debt problems.

The current economic outlook, which includes expectations for tame inflation, has supported low mortgage rates. The monthly inflation reports released this week caused investors some concern, however. The May Consumer Price Index (CPI) rose 0.2% from April, which was above the consensus forecast, and CPI was 3.6% higher than one year ago, which was the highest annual rate since October 2008. Core CPI, which excludes food and energy, increased at a 1.5% annual rate, also above expectations, and up from 1.3% last month. Meanwhile, inflation readings in China rose to the highest levels since July 2008. While it will take several months of unexpectedly high data to signal a trend, investors will be closely watching for signs of a rapid increase in inflation, which would be negative for mortgage rates.

The housing sector data released this week was stronger than expected. May Housing Starts rose 4% from April, which was well above the consensus forecast. Building Permits increased 9% to the highest level since December. A closer look at the data, though, reveals that most of the improvement came from multi-family units, while new construction of single-family homes remained at low levels.

Also Notable:

• Philly Fed declined to the lowest reading since July 2009
• May Retail Sales fell, the first monthly decline since June 2010
• The IMF lowered its 2011 forecast for US GDP growth to 2.5%
• China’s central bank again raised reserve requirements to fight inflation

Week Ahead

The big story next week will be Wednesday’s Fed meeting. No change in rates is expected, but investors will be seeking hints of any additional monetary stimulus to boost the economy. Existing Home Sales will come out on Tuesday, and New Home Sales will be released on Thursday. Durable Orders, an important indicator of economic growth, will come out on Friday. The final revisions to first quarter 2011 GDP will also be released on Friday.

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