Stocks continue their climb higher this morning, as an uptick in wholesale inflation provided a small boost to the market. The Core Producer Price Index rose 0.3% last month, pushing the year-over-year rate from 1.9% to 2.1%. Although wholesale inflation doesn’t necessarily translate into consumer inflation, it is a forward indicator of inflation overall. Tomorrow we will get a reading on the Consumer Price Index, which will show what is happening with consumer inflation. If this also shows a stronger than anticipated growth rate, we will likely see bond prices fall and mortgage interest rates pressured higher.
With tomorrow’s Federal Reserve rate announcement just around the corner, the stock market doesn’t seem overly concerned about the potential increase in the Fed Funds rate. If the Fed is committed to their stated path of rate hikes in 2017, they will likely raise the Fed Funds rate by ¼% higher. At this point, it seems that after 2017’s rate hikes are complete, the Fed will turn their focus towards reducing their balance sheet by selling both mortgage bonds and 10 Year Treasury Notes. This will likely have a more dramatic impact to mortgage rates than having the Fed raise short term rates. However, keep in mind that rates were expected to be much higher than they are now as we head into the summer months. We could see low rates linger for longer than most experts predict.
Given the lackluster performance in the bond market, there is little incentive to float on short term locks.