Inflation is Looking a Little Spooky

Good morning and happy Friday!

We got PCE numbers in this morning. Both the headline rare and the core rate came in at a .2% increase from last month and showed a 1.4% increase from this time last year. On a surface level, this 1.4% sounds pretty good as the Fed has targeted 2% annual inflation for some time now. However, if you look at the past 5 months alone instead of the past 12, you will see that we are up 1.4%. This number is just as high as the whole year because there were some months with negative inflation within the last 12 months. If inflation continues on the trajectory that it is on, mortgage rates will significantly increase in the longer term.

Yesterday the Fed started purchasing a new type of mortgage backed security which will put downward pressure on mortgage rates. However, the bond market as a whole performed poorly yesterday despite the Fed’s help. Many economist are wondering how long the bond market can hold on before investors look behind the Fed’s band aid and at the market independently.

Mortgage backed securities are still trying to overcome their 25 and 50 DMA. We are holding a locking bias as there is a good amount of room for mortgage backed securities to fall, especially with the large influence inflation and COVID news have in the market right now.