Core Inflation Data Disappoints

Overview: The past week was relatively quiet for mortgage markets. While the major economic data was a bit stronger than expected overall, it did little to alter the outlook for future growth. As a result, mortgage rates ended the week nearly unchanged.

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With investors focused on inflation, the Personal Consumption Expenditures (PCE) Price Index, the favored indicator of Federal Reserve officials, carries a lot of weight each month. In May, core PCE was 2.7% higher than a year ago, which was slightly above expectations. This was up from an annual rate of increase of 2.6% last month, which had been the lowest reading since March 2021. Progress toward the Fed’s 2% goal remains challenging, and this target level has not been seen since February 2021. Investors are watching closely to see if higher tariffs will exert upward pressure on future inflation levels.

May’s Job Openings and Labor Turnover Survey (JOLTS) report revealed unexpected strength during the month. At the end of May, there were 7.8 million job openings, which was well above the consensus forecast of 7.3 million. The ratio was about 1.07 openings for each available worker, a figure that is in line with the levels seen prior to the pandemic. A larger number of openings suggests that companies face more pressure to raise wages to hire enough workers.

Another significant economic report released this week by the Institute for Supply Management (ISM) exceeded expectations. The ISM Manufacturing Index increased to 49, which was a little above the consensus forecast. However, readings below 50 indicate a contraction in the sector. One goal of higher tariffs on foreign goods is to help domestic manufacturing companies, but it can take months or years for the benefits to be seen.

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Core PCE (annual % change)

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Week Ahead

July 3

Employment Report

ISM Services Index

U.S. International Trade in Goods and Services (aka Trade Deficit)

July 4

Markets closed for Independence Day

July 15

Consumer Price Index (CPI)