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Inflation Exceeds Expectations

Overview: Good news for mortgage rates was scarce over the past week. Stronger than expected inflation data, hawkish comments from European Central Bank members, and a budget deal were all unfavorable. As a result, mortgage rates ended the week higher.


Stronger than expected inflation data caused a sharp increase in mortgage rates on Wednesday morning. In January, the core Consumer Price Index (CPI), which excludes the volatile food and energy components, rose 0.3% from December, above the expected increase of just 0.2%. Core CPI was 1.8% higher than a year ago, above the consensus for an annual rate of 1.7%. The report on retail sales was released at the same time as CPI. The weakness in sales seen in January normally would be positive for mortgage rates, but investors clearly placed much more weight on the inflation data. In January, retail sales, excluding the volatile auto component, were flat from December, well below the consensus for an increase of 0.5%. In addition, the results for December were revised significantly lower.

Late last week, two other events also were negative for mortgage rates. Congress passed a two-year budget deal, which will increase the budget deficit more than expected. Since the deficit is funded by issuing Treasury securities, the deal will increase the future supply of bonds. This put upward pressure on yields, including mortgage rates. In addition, several officials at both the European Central Bank and the Bank of England recently have shown greater support for tighter monetary policy, which has helped push global bond yields higher. Week Ahead

Looking ahead, the Industrial Production Index, an important indicator of economic activity, will be released on Thursday, and the New Residential Construction report (also known as Housing Starts) will come out on Friday. The Existing Home Sales report will be released on February 21. In addition, Treasury auctions may influence mortgage rates on February 21 and 22.

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