Consumer Inflation Remains Tame

Mortgage bonds continue to hold their ground, even under the intense pressure created by a strong stock market.  The Dow Jones is up again this morning, a headwind for the bond market and a force driving interest rates up.  Stock prices seem to be in an over bought position, meaning we should be seeing a pull-back in the near term.  This would be good news for mortgage interest rates.  However, history shows that a pull back in stocks would be a short term event.  Betting against stocks in the longer term is a more difficult prediction to make.  Until the US economy shows stronger signs of slowing, or unless the geo-political risks heat up, stock prices will continue to rise.

This morning’s Consumer Price Index (CPI) report, which measures inflation on the consumer level, showed an increase of 0.2% in the month of December.  Although this would point to an average of strong 2.4% annualized rate, because it was below the 0.3% gain anticipated, the bond market reacted positively to the news.  Since consumer inflation is one of the most significant drivers of mortgage interest rates, as long as we see tame levels of inflation, we can expect to see mortgage rates hold in the current range.

Unless mortgage bonds have the strength to break above the current ceiling, we will maintain our locking bias.