Much stronger than expected key inflation data was negative for mortgage markets this week, and rates ended higher.
The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In October, Core CPI was 4.6% higher than a year ago, up from an annual rate of increase of 4.0% last month, and the highest level since 1991.
There are many reasons why the annual inflation rate has jumped from the readings below 2.0% seen earlier in the year, including a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. Shortages for many items have caused enormous cost increases, such as used cars prices which are 26% higher than a year ago. Fed officials and economists are divided about whether the recent spike in inflation is mostly due to temporary factors caused by the pandemic or are more structural (long-lasting) in nature. As the evidence piles up to support the latter case, investors have pulled forward the expected timeline for Fed rate hikes, and the first is anticipated to take place around the middle of next year.
The JOLTS report measures job openings and labor turnover rates, and the latest data indicated that the labor market remains very tight. At the end of September, there were a massive 10.4 million job openings, close to the recent record high. Openings are now well over three million higher than they were in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A record high number of employees also willingly left their jobs in September. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.
Looking ahead, investors will be seeking hints from Fed officials about the timing for future rate hikes and will closely watch Covid case counts around the world. Beyond that, Retail Sales will be released on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. Housing Starts will come out on Wednesday.