This morning the Labor Department issued the monthly Producer Price Index (PPI) report. This report is important for inflation expectations because it indicates price changes in the wholesale and manufacturing level of our economy. The report indicated that price changes for wholesalers and manufactures have increased rapidly over the past year (7.2%). However, if you strip out volatile food and energy prices the Core increase was only 3%.
Despite the hotter than expected inflation data, which would typically be bad for mortgage rates, mortgage-backed bonds are actually trading higher this morning because of technical trading patterns. If you’ll look at the chart below you’ll see that mortgage backed-bond prices have reached this level two other times. Each time the bond market was able to “bounce” off this floor of support and move higher, which pushed rates back lower. The difference this time is that evidence of looming inflation is more visible this time around. We are going to recommend cautiously floating for those who can afford to lose another .125% in rate. Otherwise we would advise locking.
Current Outlook: cautiously floating
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