Three Things to Know About Whether Inflation Reports Could Mean Lower Interest Rates
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By Ryan Casey Stephens, FPQP®
Special Contributor
Our weekly piece is back after a short hiatus, and the timing couldn’t be better. Markets have lost their minds and inflation, the Fed, and mortgage rates seem upside down. As rough as things seem, the consensus remains that improvement is coming.
Markets also have a way of turning on a dime — remember that the 30-year average rate was nearing 6 percent in April. Much of where we go from here hangs on a few key events this week. Let’s dig into the most important variables in this week’s Three Things to Know.
Consumer Inflation Better, But Still Confusing
Tuesday morning brought the latest and much anticipated Consumer Price Index (CPI) inflation data. In short, overall inflation decreased by 0.1 percent to 4 percent flat — better than expected. These readings are welcome if you remember that this report peaked at 9.1 percent in the last 15 months. One surprise was an increase in the cost of used cars by 4.4 percent, which made up .7 percent of the total inflation in the report.
We initially expected mortgage bonds to respond positively, but they spent the day heading lower. It’s unclear why this occurred, but it may have to do with investors moving that money into the stock market in anticipation of tomorrow’s Fed rate hike announcement.
First Thing to Know:
Even the best inflation reports are flawed, but a cooling CPI is a sign that the Fed’s higher rates are working. Consumers are feeling the pinch and spending less money. We continue to hope that lower inflation will bring lower mortgage rates, but it’s not happening as quickly as desired.
Producer Inflation to Show More of The Same
Wednesday morning we’ll see the latest Producer Price Index inflation (PPI) report. This unique tool assesses how much producers that create goods see their raw material cost increasing. It’s an interesting way to measure inflation because it’s less affected by factors like supply and demand.
Overall this report has not seen the dramatic highs that the PPE and CPI experienced. We expect the core reading to show a decline from 3.2 to 2.9 percent over the last twelve months. Chairman Powell and the other Fed members will definitely be watching this and the CPI results as they meet Tuesday and Wednesday, and the numbers will play an important role in the most anticipated event this week.
Second Thing to Know:
If the PPI report reinforces the positive numbers we saw from the CPI on Tuesday, it seems certain that the Fed will only have one option before them. Regardless, it’s encouraging that these figures continue to show cooler readings.
What Will Powell do?
The eyes of the world turn, once again, to Fed Chairman Jerome Powell on Wednesday. After the Fed members wrap their two-day meeting he will announce their latest rate decision, followed by a press conference. This will mark the 15th month in a row of higher interest rates, and it will be quite interesting to hear what he has to say.
Markets have priced in a 96 percent chance the Fed will finally stop hiking rates. That single factor makes tomorrow a tremendous wild card. The Fed’s consistent hikes have become almost predictable, and markets have responded with volatility despite being able to depend on that each meeting. Now that the game plan appears to be changing, what will happen? It’s impossible to know if stocks or bonds will receive more financial support. Lenders will need to be on guard in the week ahead, but perhaps with some hopeful enthusiasm that the worst might be behind us.
Third Thing to Know:
It will be a momentous occasion if the Fed decides it’s time to pause rate hikes. Inflation has improved dramatically since their fight began. Will this be the month we look back on and note that this is when rates for homes began to ease?
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
