Overview: Over the past week, there was no doubt about the primary influence on mortgage markets. The latest inflation data was much lower than expected, and mortgage rates declined sharply.
The Consumer Price Index (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 6.3% from a year ago, well below the consensus forecast, and down from 6.6% last month, which was the highest annual rate since 1982. Notably, used car prices dropped 2.4% in October, and significant declines also took place in apparel and medical care services. Shelter (housing) costs, which account for roughly one-third of the CPI index, continued to post sizable gains in October. However, this component generally operates with a long lag and likely will provide downward pressure on overall inflation readings in coming months. While the latest results were encouraging, inflation remains far above the Federal Reserve’s stated target level of 2%. To help reduce inflationary pressures and reach this goal, the Fed will continue to raise the federal funds rate at future meetings. However, the magnitude of additional rate hikes anticipated by investors declined due to the latest data. Investors were nearly evenly split before the report between a 50 and a 75 basis-point increase at the next meeting in December and now widely expect just 50 basis points. The outlook for the ultimate peak in the federal funds rate also moved lower. Consumer spending accounts for over two-thirds of U.S. economic activity, making it an important indicator of the health of the economy. With higher prices causing many people to trim their expenses, investors have been concerned that discretionary spending will take a hit this holiday season. However, the latest results showed no signs of this taking place so far. In October, retail sales jumped 1.3% from September, above the consensus forecast, and were a strong 8.3% higher than a year ago. Particularly large gains were seen in spending at restaurants, auto dealers, and furniture stores.
Core CPI (annual % change)
Week Ahead
November 17 — New Residential Construction report (aka Housing Starts)
November 18 — Existing-Home Sales report
November 23 — New-Home Sales report
November 24 — Mortgage markets closed in observance of Thanksgiving
November 25 — Mortgage markets closing early in observance of Thanksgiving