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The Producer Price Index (PPI) was released this morning and showed that inflation on the wholesale level was hotter than anticipated. In the month of June, the PPI increased by +0.4%. This was a sizable increase and larger than the market anticipated. The Core Rate, which strips out food and energy costs, rose by 0.3%. Again, this was greater than expected. However, the year over year numbers are still very timid. The Headline figure increased from -1.1% up to -0.7%, while the Core Rate increased from 0.6% up to 0.8%. If future month’s reports continue to be strong, they will replace those of 12 months prior in computing the year over year figures. Therefore, the year over year averages will slowly move higher and closer to the Fed’s target of 2%.

Fed President Janet Yellen has been speaking in the House this morning, and will be speaking tomorrow to the Senate in her semi-annual testimony. The focus of the talks so far has been on the rate of increase once the Fed begins moving short term rates higher. She said that we are now close to the point of rising rates and that the US economy not only can tolerate higher rates but needs them as well. Given that a rise in short term interest rates would help fend off inflation and slow our overheating stock market, the bond market took this as good news and began to rally. We feel that a Fed rate hike would ultimately be a good move for mortgage interest rates and could slow the rate of increase. Hopefully, a rate increase will happen soon so that our theory can be tested.

After suffering losses early in the trading day, mortgage bonds are now positive on the news from Janet Yellen. Bonds remain trapped beneath overhead resistance. This makes current pricing attractive and now a great time to lock.