Overview: Investors were focused on two major economic events this week. The Consumer Price Index (CPI) inflation data was positive for mortgage markets, while the Federal Reserve meeting outcome had a negative impact. The net result was a slight increase in mortgage rates.
As expected, the Fed raised the federal funds rate by another 50 basis points on Wednesday to a target range of 4.25% to 4.5%, the highest level since December 2007. The primary focus for investors was officials’ projected peak for the federal funds rate, which increased to 5.1%. Prior to the meeting, the investor outlook for this “terminal rate” had been below 4.9%. The potential for more aggressive monetary policy tightening was negative for mortgage markets.
CPI is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term inflation trend. Core CPI in October was up 6% from a year ago, below the consensus forecast and down from 6.3% last month, but still far above the Fed’s stated target level of 2%. Used car prices, which soared during the pandemic due to supply shortages for new cars, dropped 2.9% in November, helping the figures come in below the expected levels. Overall goods prices fell 0.5%, the largest monthly decline since April 2020. Shelter (housing) costs, which account for roughly one-third of the CPI, continued to post significant gains in November, but this component generally operates with a lag. Current indicators of shelter costs, such as newly signed rental agreements, suggest that this area will provide downward pressure on overall inflation readings in coming months.
Core CPI (annual % change)
Week Ahead
December 15
European Central Bank meeting (50 basis-point rate increase expected)
Retail Sales report
December 20
New Residential Construction report (aka Housing Starts)
December 21
Existing-Home Sales report
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