Overview: Stronger than expected economic data was highly negative for mortgage markets over the past week. Two of the most important monthly reports, covering inflation and the labor market, both exceeded their consensus forecasts. As a result, mortgage rates climbed to the highest levels of the year.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In March, core CPI rose 0.4% from February, above the consensus forecast, and stands 3.8% higher than a year ago. Although the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2% seen early in 2021, which is the stated target level of the Federal Reserve. Shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase. Other categories with large monthly increases included restaurants, medical care, and auto insurance.
Following three months of unusually strong gains, the economy topped them all in March by adding another 303,000 jobs, far above the consensus forecast of 200,000. The greatest increases were seen in the healthcare, government, and restaurant/hospitality sectors. Beyond this enormous headline number, the other major components of the report were roughly in line with expectations. The unemployment rate fell from 3.9% to 3.8%, which is still above the 70-year low reached last April. Average hourly earnings were 4.1% higher than a year ago, down from 4.3% last month. Fed officials keep a careful watch on wage growth because it generally raises future inflationary pressures.
The minutes from the March 20 Fed meeting released on Wednesday revealed no significant new information beyond what officials have said in speeches over the last few weeks. The consistent message is that they are in no hurry to cut interest rates, especially after the strength seen in the recent inflation and labor market data. Officials generally prefer to wait for "greater confidence" that inflation will continue on a path down to their target level of 2%. At the beginning of the year, investors expected a rate cut in March, but they now anticipate that the first reduction will not take place until September.
Core CPI (annual % change)
Week Ahead
April 11
European Central Bank meeting
April 12
Import and Export Price Indexes
April 15
Retail Sales report
April 16
New Residential Construction report (also known as Housing Starts)