Relative Calm in Markets
After several weeks of extreme volatility in mortgage markets due to concerns about the banking sector, perhaps the most noticeable change this week was the relative calm. While investors remained alert for troubles spreading to additional banks, tensions have eased, and the daily swings in mortgage rates have returned to more normal levels. Just as the increased uncertainty earlier in the month caused investors to shift from equities to safer assets such as mortgage-backed securities, reduced concerns had the opposite effect, and mortgage rates ended last week higher.
PCE Service Costs Up
The PCE price index is the inflation indicator favored by the Fed. In February, core PCE, which excludes the volatile food and energy components, was up 4.6% from a year ago, slightly below the consensus forecast, and down from an annual rate of 4.7% last month. The cost of services continued to increase more than prices for food and other goods.
Inflation Battle Implications
The annual rate of increase in Core PCE remains far above the Fed’s target level of 2.0%. After peaking in September, many investors thought that it would continue to ease every month, but the actual path has been bumpier. Fed officials have been warning repeatedly that the inflation battle will be difficult, with both ups and downs along the way. This is particularly relevant because how quickly their aggressive monetary policy tightening will bring down inflation has enormous implications for financial markets.
Mortgage Applications Modest Uptick
Mortgage activity, which was recently at the lowest levels in 25 years, has picked up a bit lately. According to the latest data from the Mortgage Bankers Association (MBA), purchase applications rose modestly from last week, yet are still down 35% from last year at this time. Applications to refinance increased 5% from the prior week, but remain down a massive 61% from one year ago.
Major Economic News Due This Week
Investors will continue to keep a close eye on the banking sector to see if troubles spread to other institutions. They will also monitor to see if Fed officials elaborate on their plans for future monetary policy. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month. In addition, the ISM national manufacturing sector index will come out on Monday and the ISM national services sector index on Wednesday.
