Inflation Ticks Higher

Stocks are pointing slightly higher in premarket trading this morning, boosted by news of stronger than expected earnings as well as news of major mergers hitting the wires.  This is adding a bit of upward pressure to mortgage interest rates.

We received a critical report on consumer inflation this morning, with the Core Personal Consumption Expenditure report showing that inflation is currently running at a 1.9% annualized rate. This is outrageously close to the Fed’s target rate of 2%, and came in exactly as the market anticipated. Given that just one month ago reports were showing an annualized rate of 1.6%, this is a strong jump closer to the goal. Inflation is expected to exceed the Fed’s target in the months to come. As a result, we can anticipate the path of interest rates to continue to drive higher.

Personal Spending climbed by 0.4% last month, which also was in line with the markets’ expectations. This is a strong jump from the prior report of 0% increase, and shows there could be a growing level of consumer confidence.  Consumer Confidence is one report in which I generally place a high level of value. However, lately it has inflated to such high levels that it seems irrational. If something is not sustainable, it must fall. This will likely eventually be an issue we will face in the U.S. economy.

With markets still vulnerable, there is little incentive to float a rate. We will maintain our locking bias.