Consumer Inflation Reports are In

Mortgage bonds are performing well today, likely staging an attempt to break above the ceiling of resistance that bond prices must overcome for mortgage interest rate pricing to improve. Since breakouts are the exception and not the rule, it’s too early to say if this attempt will be successful.

The news of the morning included the Federal Reserve’s favorite gauge of inflation, the Personal Consumption Expenditures (PCE) report. The headline number showed 0% increase on a month-over-month basis, and an annualized drop from 1.5% down to 1.4%. The Core Rate, which removes food and energy prices, etched up 0.1% for the month and increased to an annualized pace of 1.8%. Since the Core Rate is the more closely watched report, it is just beneath the Fed’s target rate of 2%. This is not great news for the stock market, which really would like to see low levels of inflation continue so the Fed remains comfortable continuing to cut rates. We’ll be watching the markets’ reactions to the reports over the days to come to see where things settle.

Consumer Sentiment came in stronger than last month, moving up to a reading of 93.2. Despite the trade war, global economic slowdown, and a slowing GDP, the consumer continues to feel strong. Given that the consumer is the backbone of the US economy, this is a strong sign for the near term, which is good for the stock market and not good news for mortgage interest rates.

Unless bonds can break above the duel ceilings provided by their 25- and 50-day moving averages, we will maintain a locking bias.