After stripping out Food and energy costs, inflation on the consumer level came in at a rate below the market’s expectations. According to this morning’s Consumer Price Index (CPI), Core inflation in the month of September increased by only 0.1%. This fell short of expectations of 0.2%. When adding in food and energy prices, inflation increased 0.5% last month. Since oil prices increase dramatically during this period, the move higher was anticipated. This puts the year over year inflation rate at 2.2%, which is above the Fed’s target rate of 2%. This provides the Fed a bit of room to justify the anticipated December interest rate hike. However, since it was oil price dependent, if oil prices move lower, we could see this rate drop once again below the Fed’s target.
Retail Sales came in at a dismal annualized rate of increase of just 1.6%. This was below expectations of 1.8%. Since this number reflects spending on the consumer level, it is considered a primary driver of economic growth. As the consumer spends more, the U.S. economy generally improves.
Mortgage bonds are now at just below a critical ceiling of overhead resistance. If bonds can break above this level, we could see rates improve. However, until that happens, the safe play is to maintain a locking bias.