Inflation Matches Expectations

Without a doubt, the biggest consideration for mortgage rates right now is the progress in the battle to tame inflation. The latest major inflation data was right in line with expectations, however, leaving investors to focus on Japanese monetary policy and U.S. government spending. These secondary influences were negative for mortgage rates, which ended the week a little higher.

While the efforts to bring down inflation took another step in the right direction this month, there is still a long way to go. The core CPI annual rate has fallen from a peak of 6.6% in September 2022, but it remains far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Progress has been slow due to stubbornly high prices in certain areas of the economy. In particular, shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase. By contrast, used vehicle prices and airline fares posted significant declines. 

In addition to inflation data, mortgage rates were influenced by a couple of other factors this week. First, investors are paying more attention to the massive supply of debt issued by the government to fund its budget deficit. The Fitch rating agency recently downgraded U.S. sovereign debt, citing high levels of government spending, causing investors to demand higher yields to offset the added risk. In addition, the Bank of Japan (BOJ), which restricts Japanese bond yields to a limited range, announced that it will raise the upper end of that range. Investors are wondering if this will be just the first step in a larger plan to permit yields to rise even more in the future. If so, this would apply upward pressure to yields in the U.S. and other countries as well.

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. For economic data, 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 measure of the health of the economy. Housing Starts will come out on Wednesday.