Mortgage Rates Moved to the Top of the Latest Range

Mortgage rates moved sharply higher today as strong selling developed throughout the day.  This morning December CPI was reported showing inflation is now infecting the consumer prices. It took a few hours but as the morning went on inflation concerns spread through the fixed income markets. The monthly CPI, both overall and the core were right on forecasts but the ringer was in the annual change. Annual CPI increased to 2.1% and the core CPI to 2.2%. The overall that includes food and energy increased from 1.7% in Nov to 2.1% a sizeable increase and lit another fire under inflation fears.  The increase of energy prices is pulling up overall prices but still not yet serious. The Fed will not wait much longer if inflation reports continue to increase. 

Janet Yellen’s favorite inflation report is the personal consumption index that is released with the monthly retail sales data. In her speech, late this afternoon, she stated employment is at full levels, the economy is picking up speed and wage growth is increasing but is still fairly low. “Changes in monetary policy take time to work their way into the economy. Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road--either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.” 

Tomorrow, the last day this week for data, we get weekly claims, December housing starts and permits, and January Philadelphia Fed business index.

CPI and Yellen’s comments about increasing rates combined to drive mortgage prices down the most in over three months, which in turn relates to higher rates. The 10yr yield once again rejected 2.35% as a major resistance level. It closed at 2.32% yesterday, looked promising but today it crumbled once again.  CPI then Yellen, fixed income yields rose today; her headline today, warning that waiting too long to increase rates will result in a nasty surprise for the economy. No new news but a reminder that the Fed is likely to make the next move higher at the March FOMC meeting.

The 10yr opened weak and MBS prices made rates climb today.  I reported this morning to watch the 10yr, and if you were wise, you would have locked early this afternoon before the price changes.

In summary, the good news is that bond markets stayed within recent ranges today; the bad news is that we touched the upper bounds of those ranges, as opposed to yesterday's spot near the bottom.  Rates were slightly higher this morning, and by the afternoon, they went even higher as bond losses mounted.  Pricing has been quite steady for all of January, and we had hoped that trend continues.  If you have not locked and you have some time before closing and a measure of risk tolerance, floating here may bring some rewards since we are again near the top of our recent ranges.  As always, if you are losing sleep over rate markets and spending more time watching bond movement than playing with your kids/dog, probably best to lock and relax.