Stunning Round Trip For Mortgage Rates After Inflation Data
There was no way to be sure what the effect of today’s economic data would be on mortgage rates. All we knew is that the Consumer Price Index (CPI) would be released at 8:30am ET and that CPI releases have been the biggest sources of volatility for interest rates in 2022 and especially since June. If you’re wondering what CPI has to do with mortgage rates, here’s a quick run-down:
mortgage rates are based on trading levels in bonds
bonds care a lot about inflation and about Fed policy
Fed policy is more likely to be less friendly to rates if inflation is higher than expected
CPI is the biggest inflation revelation on any given month
Case in point, the following chart shows the market’s expectations for the Fed Funds rate, both at the December 2022 and June 2023 Fed meetings. CPI reports have been at ground zero for most of the big moves. As we often like to remind our readers, the Fed Funds Rate is not the same as mortgage rates, but longer-term Fed rate hike expectations (which is what’s in the chart above) correlate much more readily with longer-term consumer rates such as those for mortgages. At the very least, big moves tend to be big moves in either case. The same correlation held true after this morning’s CPI came in hotter than expected. In other words, mortgage rates surged to new 20 year highs this morning. Now, you may be wondering why higher inflation is such a surprise if all anyone seems to be talking about on the topic of inflation is how damn high it is. But when it comes to the bond market, traders have long since priced in everything that was already known and assumed about inflation. Today’s CPI data brought NEW information to light. If CPI had been right in line with the average economist’s forecast, it may not have garnered much of a response from the market. But it came in higher than forecasts, and that was a rude awakening for bonds.
Read more here: https://www.mortgagenewsdaily.com/markets/mortgage-rates-10132022