Mortgage Rates Improve on Inflation Data

Mortgage Rates Improve on Inflation Data

On target inflation data and strong demand for the longer-term Treasury auctions were favorable for mortgage rates this week. The other major economic reports contained few surprises. As a result, mortgage rates ended the week lower.

In recent weeks, the primary influence for mortgage rates has shifted from global events in Japan and the Middle East to the outlook for inflation. Last week’s rate hikes in Europe and China to fight inflation raised concerns that the Federal Reserve was falling behind with its lack of tightening, and mortgage rates moved higher. This week’s tame inflation data eased those concerns, with the addition of reduced interest rates being improved. The March Consumer Price Index (CPI) rose 0.5% from February, matching the consensus forecast, and was 2.7% higher than one year ago. Core CPI, which excludes food and energy, increased at a low 1.2% annual rate, which was a little lower than expected.

Rising commodity prices have focused attention on the distinction between overall inflation levels and core inflation levels. Core inflation excludes the volatile food and energy components, so it is often viewed as a better indicator of short-term inflation trends by economists and Fed officials. While consumers certainly struggle with higher gas prices, longer-term inflation trends generally are more influenced by other factors such as wages and housing costs, which recently have been increasing very slowly. In short, stronger than expected demand for commodities and violence in the Middle East have pushed energy prices significantly higher, but Fed officials forecast that this represents a temporary increase in overall inflation levels. Commodity prices are not expected to climb at this pace indefinitely. If food and energy prices stabilize, then the gap between overall and core inflation levels will likely shrink.

Also Notable:

• The Beige Book reported that economic activity “generally continued to improve”
• Capacity Utilization rose to the highest level since August 2008
• The sovereign debt of Ireland was downgraded again
• Gold prices reached a record high above $1,480 per ounce

Average 30 yr fixed rate: Last week: +0.05% This week: -0.10%

Stocks (weekly): Dow: 12,300 -100 NASDAQ: 2,750 -30

Week Ahead

Next week will be shortened by a holiday and will be a light week for economic data. Housing Starts will be released on Tuesday. Existing Home Sales will come out on Wednesday. Philly Fed and Leading Indicators are scheduled for Thursday. Mortgage markets will close early on Thursday and will be closed on Friday in observance of Good Friday.