Consumer Inflation Moves Higher

Mortgage bonds came out of the gates strong this morning, as currency fears in Turkey have experienced a 12% currency plunge since yesterday. This is driving inflation significantly higher in Turkey. To help explain how significant this problem is, the Turkey equivalent to our 10-Year Treasury Note yield is greater than 20%. Compared with a 2.89% yield here in the U.S., this is clearly a problem.

The Consumer Price Index (CPI) report showed that consumer inflation rose by 0.2% in the month of July. This was in line with the market’s expectations, so there wasn’t a reaction in the market. The year-over-year reading came in at 2.9%, which matches the fastest pace of inflation in almost 7 years. Given that consumer inflation is one of the most important drivers of mortgage interest rates, we need to watch this closely. As inflation heats up, mortgage interest rates will climb higher.

Given that bonds remain up against significant resistance, the safe play is to maintain a locking bias.