Good day to lock

Strong economic news continues to dominate the headlines.  The Consumer Price Index (CPI) was reported this morning higher than market expectations.  The headline number was unchanged at 0.0% when the expectation was for a -0.1% decline.  The Core Rate, which strips out food and energy, was reported to be up 0.2%, which was also higher than expectations of 0.1%.  Year over year, the headline number was up 1.7%, and the Core CPI was up 1.8%.  Although still below where the Fed would like to see inflation, it was surprisingly higher than expectations.

Continuing the good news was the Philadelphia Fed Survey for the month of November which came in at 40.8.  This was much higher than expectations of 18.0 and also higher than last month’s reading of 20.7.  To put into perspective the strength of this report, the last time the reading was this high was in 1993!  Further, Leading Indicators for the month of October were reported to be up 0.9%, which is better than the 0.5% expected, and also better than last month’s reading of 0.8%.

Yesterday’s Fed Meeting Minutes showed that the Fed is likely more concerned with deflation than they are with inflation.  They said they expect inflation to edge lower in the months to come and were worried inflation would stay below the 2% target for “quite some time.”  Based on the Fed’s history over the past 5 years of projecting inflation, I find this troubling.  In 2010 inflation was expected to move higher, causing the Fed to push short term rates higher in 2011.  In 2011 it was supposed to happen in 2012 and so on and so on….  Now that we are entering 2015 and inflation never moved higher as expected and now they project lower inflation?  If in fact they again miss the mark as they have for many years, we could see inflation finally move higher.  It’s hard to say at this point, but anything is possible.

Mortgage bonds tested the top of their sideways trading pattern this morning.  I wouldn’t be surprised to see bonds move down another 25 basis points to test the bottom of the range.  Therefore, we will have a locking bias at this point.  We are still waiting to see when the stock market will take a break from its powerful move higher.  It doesn’t appear that is happening today; but when it does, that will help provide support to mortgage interest rates.