Consumer Inflation Remains Low

After closing above the 25-day moving average on Friday, mortgage bond prices have been fighting this critical level all morning. Prices have been bouncing from being on top to beneath this level like a ping pong going back and forth. My guess is that bond prices will fall to the point at which they closed on Thursday, as that would close the gap-up opening they experienced on Friday morning. After this happens, they may resume their climb higher and hopefully once again close above their 25 DMA. If not, however, prices will likely remain stagnant, trading in the range between their 25- and 50-day moving averages. Today will be another important day for the near-term direction of mortgage interest rates.

The news of the day has been generally bond-friendly, highlighted by the Fed’s favorite gauge of consumer inflation. The Headline Personal Consumptions Expenditures (PCE) report showed that consumer inflation increased on an annual basis from 1.3% up to 1.5%. However, the increase was entirely from the cost of oil increasing. In fact, the Core Rate (which excludes food and energy prices) decreased, moving from 1.7% down to 1.6%. This is well below the Fed’s target rate of 2%, which is good news for mortgage interest rates. If we see consumer inflation remain low, we can expect for rates to do the same.

It is still too early to say which way mortgage rates will head. Until a clear direction is established, we suggest a locking bias.