Both stocks and mortgage bonds are relatively flat so far this morning, as markets digest news of stronger inflation. According to the Personal Consumptions Expenditures (PCE) report, Core Inflation rose 0.2% in the month of August and increased to a 2.0% rate on a year over year basis. PCE is the Fed’s favorite gauge of consumer inflation. It has now hit the stated target of 2% that the Fed has been fighting for years to achieve. Although the market anticipated this accomplishment, higher inflation is not good news for mortgage interest rates. As inflation moves higher, rates of returns must move higher for an investor to achieve the same net return.
There are many industries, such as real estate and mortgage, that are experiencing tremendous technological advances that will soon drive consumer prices lower. Since technology can reduce inflation, we could see inflation have a more difficult time climbing in the years to come. This will certainly impact our labor market, as AI continues to replace the human worker. The next decade will bring interesting changes to all of us.
Given the continued upward pressure on mortgage interest rates, we will maintain our locking bias.