Houston's Rate Sheet

Rate Watch

Inflation concerns continue to drive mortgage rates up

As we’ve discussed before, inflation are interest rate’s worst enemy. Inflation erodes the value of a bonds value overtime, and lenders must factor in a premium to compensate for inflation. Lenders and Investors can only use their best guess of what inflation will be over the long-term as they price mortgage rates. As inflation rises, lenders re-adjust their expected future inflation figures and the market in turn adjusts causing interest rates to rise. Since, consumers make up two-thirds of economic activity, Consumer Price Index (CPI) is watched more closely than any other inflation metric. So, on Wednesday of last week, when CPI hit its highest year-over-year average in more than 2 and a half years, the market quickly adjusted their expected inflation numbers and the mortgage rates rose sharply. CPI rose an uncomfortable 0.4 percent for a second straight month, putting the year-on-year rate at 4.3 percent. With high oil prices, the market would typically shake this number off. However, CPI less food & energy rose 0.3 percent. Since, consumers are already hurting from a weak job market and declining economic growth, this news could have a greater impact on economic growth. Inflation hits right at the consumer’s pocketbook and could further curb consumer spending. It will also be very difficult for the Federal Reserve to justify further cuts to the Federal Funds rate, if these inflation indicator remain high.

This week, Bankrate.com’s overnight average on the 30-year fixed rate mortgage came in at 5.95 percent, up from last Monday’s 5.81 percent. Other products followed. The 15-year fixed rate mortgage, a popular product for refinances, averaged 5.44 percent, up 20 basis points from 5.34 percent. Even short-term rates were not immune, the 5-year Adjustable rate Mortgage averaged 5.10 percent, up from last Monday’s 5.00 percent.

Inflation will continue to be a concern on this week’s economic calendar. On Tuesday, the Producer Price Index (PPI) will be released. PPI measures the averaged change in prices received by domestic producers for their output. Although, PPI is not as widely followed as CPI, it is still a very important measure of inflation. On Friday, the Personal Consumption Expenditures (PCE) price index will be released. The PCE price index is the Federal Reserve’s most liked measure of inflation. It measures the average increase in prices for all domestic personal consumption. If both of these reports show a high level of inflation, it could force interest rates even higher on the week. Since, inflation is expected to remain high, Borrowers are encouraged to lock interest rates as soon as possible.

Also, on the calendar this week, the Durable goods orders report will be released on Wednesday. Durable goods orders reflect the new orders placed with domestic manufacturers for those goods that don’t quick wear out, such as automobiles, large appliances, etc. This report is a good measure of the health of the economy. On Thursday, the 2nd reading on Gross Domestic Product (GDP) for the 4th quarter of 2007 will be released. Since, GDP encompasses all economic activity for a given quarter, it takes the compilers a couple of tries to get it right. Obviously, this reading will have less impact than the initial reading.

posted by Vincent Biondillo @ 12:06 PM