Inflation Parties on

We have said that record inflation is coming at us like a train. Well, the trains at the station. The CPI core inflation came in this morning at 3.8% while total inflation came in at 5%, the highest reading since we were blessed with the movie Wayne’s World (1992).

Like we have said, this record inflation is exaggerated by deflation that we saw a year ago. However, the record inflation is real in many industries. Namely, those who were whipsawed by the plummeted demand during the Covid shutdown and then mass demand during the recovery. Vehicle sales, retail, travel, and dining are some of the industries leading this inflation surge.

What does this mean for rates?

Well, the answer depends on the year you are living in. If you live in any year pre Covid vaccination, it means that mortgage rates are about to skyrocket. If inflation is at 3.8%, it means that whoever is servicing your mortgages that are in the 2’s or 3’s is losing a TON of money. However, if you live in the years post vaccination, it does not mean a whole lot… Other than the Fed will increase its billions of weekly Mortgage Backed Security spending to keep mortgage rates stable.

Now, that’s the big question. How long is too long for the Fed to keep the housing industry propped up? How high can the housing industry climb before it is unable to stand on its own?

These questions are set to be the topic of discussion at the Fed’s Jackson Hole meeting this fall. Unfortunately for the housing market, rumor has it that many Fed members think we are about there. If that is the case, we can expect rates to have a more natural response to a 3.8% inflation reading.

So far today, the MBS market is up 5 bps and are pressed up against their 100 DMA. That has been a strong ceiling and they will likely bounce lower. We are holding a locking bias.