Inflation Climbs

The two major reports released this week on inflation and durable goods were roughly in line with expectations, and mortgage rates ended nearly unchanged.
The reduced economic activity resulting from the pandemic caused a large decline in inflation last year, which was one of the factors responsible for record low mortgage rates. With the distribution of the vaccine and the reopening of the economy, investors are now concerned that inflation may be heading much higher, and the latest data reinforced this view.
The core PCE price index is the inflation indicator favored by the Fed. In April, core PCE was 3.1% higher than a year ago, matching the consensus forecast, but up from an annual rate of increase of 1.9% last month. The question facing investors is whether higher inflation is mostly due to temporary factors related to the reopening of the economy or to more persistent issues, and the answer will have a big impact on future mortgage rates.
In economic terms, durable goods are items which last three years or longer, tend to be expensive, and generally are purchased infrequently, such as large appliances and vehicles. In April, new orders of durable goods fell 1.3% from March, which was far below the consensus forecast for a moderate increase. However, excluding the transportation category, which contains mostly aircraft orders that are highly volatile from month to month, new orders exceeded expectations with an increase of 1.0% from March. In addition, the figures for March were revised higher. As a result, the report was viewed as roughly neutral overall for mortgage rates.
Similar to last week’s report on existing home sales, the data on new home sales released this week fell short of expectations. In April, new home sales declined 6% from March, and the March results were revised significantly lower. A lack of inventory, especially in the lower price range, remained a major obstacle. The median new home price of $372,400 was 20% higher than last year at this time.
Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national manufacturing index will come out on Tuesday and the ISM national services index on Thursday. Mortgage markets will be closed on Monday for Memorial Day.
Weekly Change
10yr Treasuryflat0.00
Tue6/1ISM Manuf
Thu6/3ISM Services