Locking Bias

The Consumer Price Index (CPI) for the month of June was released this morning. As expected, It showed that inflation on the consumer level is heating up. The Headline number showed a monthly increase of +0.3%. When you take out food and energy, the Core Rate of inflation is +0.2%. Since the market anticipated this level of increase, the reaction in the bond market was muted. The concern going forward is that the year over year numbers, which came in at +0.1% for the Headline Rate and +1.8% for the Core Rate, will continue to move higher as the months move on. As we discussed in yesterday’s update, the headline number this month of +0.3% replaced the +0.1% from June of 2014 which pushed the annual growth rate higher. As higher months in the future replace lower numbers from 12 months previous, the year over year number will step closer to the Fed’s target rate of +2.0%.

The housing market continues to strengthen. Housing Starts and Permits for the month of May were released this morning. By definition, a housing start is defined by the foundation of a new home being poured. It was reported that 1.1746 million units were started, which was an increase of 10% from just one month prior. This was the second strongest Housing Starts report since 2007 when the housing boom was nearing its final stage. Of course, we all remember what happened immediately afterwards. The fear of that memory is causing many builders to wonder how long this blossoming market will be around. With builder confidence reaching records since the mid-2005 range, the fear is certainly understandable.

Mortgage bonds remain trapped beneath a significant overhead resistance level. Until bonds are able to make a break above the ceiling, we will suggest locking while at the top of the range.