Rising Inflation

January 13, 2016

Rising Inflation

Mortgage rates showed small improvement through most of the week. Friday’s inflation data caused a reversal, however, and mortgage rates ended the week slightly higher.

Early in the week, investors shifted some assets from stocks to bonds, including mortgage-backed securities (MBS). Comments from President-elect Trump were one reason that investors sold certain stocks. In his first press conference since the election on Wednesday, Trump stated a goal of reducing costs in certain areas such as pharmaceuticals and defense spending. The added demand for MBS from investors caused mortgage rates to decline.

On Friday, one report on inflation and one report on economic activity were released. Investors focused more on the upside surprise in the inflation data rather than the small miss in retail sales. In December, the core Producer Price Index (PPI) was 1.6% higher than a year ago, up from an annual rate of 1.2% in November. In July, the annual rate for core PPI was just 0.7%.

PPI focuses on the increase in prices of “intermediate” goods and services used by companies to produce finished products. Core PPI excludes the volatile food and energy components. Since inflation reduces the value of future cash flows, the unexpectedly large increase was negative for mortgage rates. Following last Friday’s stronger than expected wage inflation data for December, investors have been watching for signs of rising inflation, and the reaction to the PPI report was larger than usual.

Looking ahead, additional information about policy changes under the Trump administration could continue to affect mortgage rates. The Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Wednesday. CPI looks at the price change for goods and services which are purchased by consumers. Industrial Production, an important indicator of economic activity, also will be released on Wednesday. Housing Starts will come out on Thursday. The next European Central Bank meeting also will take place on Thursday and could influence U.S. markets. Mortgage markets will be closed on Monday in observance of Martin Luther King Jr. Day.

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