Mortgage bonds are under pressure this morning, falling partially due to reports of higher consumer inflation. This morning’s Headline Consumer Price Index (CPI) report showed that inflation on the consumer level ticked up 0.3% and moved up from 1.7% to 2.1% on a year over year basis. When stripping out food and energy prices, the Core Rate increased 0.2% from last month, with the annual increase jumping from 2.1% up to 2.2%. This strong report is certainly a concern for mortgage interest rates in the near term, and will be viewed by the Fed as a justification for more interest rate hikes in the near term. Although the Fed prefers the Personal Consumption Expenditures report as their primary gauge of consumer inflation, they won’t ignore the results of this morning’s CPI report.
One key consideration for mortgage interest rates going forward is the outlook on the valuation of the US dollar. A strong dollar has been what has prevented inflation in the US from moving higher. It also makes the cost of exports higher, which lowers the demand for US goods and services in other nations. With President-Elect Trump’s plans to revitalize the US manufacturing sector, he will need stronger demand from competing economies, such as the UK. This would require a weaker US dollar, which means higher rates of inflation in the US. This translates to higher mortgage interest rates likely under his administration.
With bonds showing weakness, the safe play will be to lock.