Jerome Powell’s testimony before the House Financial Services Committee. While his prepared remarks may not contain any surprises, it’s during the Q&A session that we might see some market-moving discussions. One key aspect to watch out for is the Producer Price Index (PPI), which often leads the way for Consumer Price Index (CPI) trends. Despite its significance, the Fed doesn’t give PPI much attention but should be given more respect.
PPI as an Inflation Indicator
To illustrate the relationship between PPI and CPI, let’s take a closer look at the charts. The blue line represents the PPI, which starts moving lower before the CPI follows suit with a lag. This pattern suggests that monitoring PPI can provide insights into future inflation levels. While the Fed focuses on the core PCE (Personal Consumption Expenditures) index, which factors in CPI, it’s also essential to consider the PPI.
Bond Market Reaction to UK Inflation Concerns
Today, we’re facing a challenge in the mortgage-backed securities market as they are down around 25 basis points. This setback is partly influenced by inflation concerns originating from the UK. It’s crucial to remember that the global economy is interconnected. The UK, facing unique circumstances such as Brexit, has seen its core inflation rate reach a 31-year high at 7.1%. However, their situation differs from ours, as their weaker currency and changes in trade deals contribute to higher import prices. Thus, the bond market needs to consider these factors affecting UK inflation.
Mortgage Rates, Refinancing Activity, and Rental Data
Looking at last week’s MBA mortgage application survey, interest rates have hovered around 6.75%, not far off from the levels seen in the previous year at 6%. Interestingly, when rates were at 6%, refinance activity was 66% higher than the current levels. Therefore, if we see a decline in mortgage rates towards the 6% mark, we can expect a significant boost in refinancing activity.
Additionally, we received rental data from CoreLogic’s Single-Family Rent Report, which indicates a 3.7% year-over-year rent increase. This is an improvement from previous reports, suggesting that shelter costs, which heavily influence inflation measures like CPI and PCE, are moving in a favorable direction.
Upcoming Events and Market Performance
Today, we eagerly await Powell’s testimony and the subsequent Q&A session. There will be a 20-year bond auction at 1:00 PM Eastern Time. Monitoring these events is crucial as they can have a notable impact on the market.
As for market performance, unfortunately, mortgage-backed securities are down 28 basis points due to the influence of UK inflation concerns. We made significant progress with the 10-year Treasury yields yesterday, but today we’re seeing some retracement. It’s possible that the market is concerned about Powell’s remarks and potential bond-unfriendly statements. We’ll closely monitor the situation and provide updates as necessary.
It’s essential to stay updated with the latest developments in Powell’s testimony, inflation indicators, and market trends. This information will help guide your decisions and strategies. We encourage you to monitor the charts and observe any significant trends influencing your approach. Remember, we are here to provide timely analysis and insights to support your decision-making process.
