Rates Steady Amid Mixed Data
The major economic reports released last week contained some good news and some not-so-favorable news for mortgage markets. The inflation data was lower than expected overall, but consumer spending surprised strongly to the upside. These results were roughly offsetting, and mortgage rates ended last week with little change, remaining near the lowest levels of the year.
Core CPI Eases
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 July, Core CPI was 3.2% higher than a year ago, down from 3.3% last month, and the lowest annual rate of increase since April 2021.
Inflation Elevated in Other Areas
Although this annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. One big reason is that shelter (housing) costs remain elevated and again were responsible for the largest portion of the increase. By contrast, used vehicle prices dropped 2.3% from June and were down 11% from a year ago. Other categories which posted declines in July included medical services, apparel, and new vehicle prices.
PPI Below Consensus Forecast
Another significant inflation indicator released last week, which measures costs for producers, was lower than expected. The core Producer Price Index (PPI) was 2.4% higher than a year ago, down from an annual rate of 3.0% last month and far below the consensus forecast of 3.0%. Of the two major inflation reports, investors tend to place less weight on PPI since it reflects a smaller slice of the economy than CPI.
Economic Optimism Rebounds
After several months of relatively weak readings, investors were becoming increasingly worried that higher prices were finally slowing consumer spending. The latest data greatly eased those concerns, however. In July, retail sales surged a full 1.0% from June, far better than the consensus forecast of just 0.3% and the largest monthly increase since April 2022. Looking at individual categories, motor vehicles, electronics, and appliances showed the strongest gains, while clothing stores and sporting goods displayed a bit of weakness.
Refinance Boom Lifts Market
Mortgage applications benefited from lower rates again last week. According to the latest data from the Mortgage Bankers Association (MBA), applications to refinance surged 35% from the week before last, the strongest gain since May 2022, and were an enormous 118% higher than one year ago. By contrast, purchase applications rose just 3% from the prior week and still were down 8% from last year at this time.
Mortgage Rates for the week of 8-19-2024