Rates Hold the Line

Mortgage Rates Hold Recent Lows

After last week’s reality check with the Jobs report, mortgage rates improved and held their lows this week. There was normal movement up and down but all at lower levels that haven’t been consistently seen since October of 2024. This could indicate the long-awaited start to the decline in interest rates.

There is now a 90% market expectation of a Federal Reserve rate cut at their meeting in September. Many market watchers are expecting 3-4 cuts in the waning months of this year. While the Fed doesn’t set mortgage rates, this commentary has repeatedly discussed how changes to the Fed Funds rate influences Treasuries and mortgage rates. Intuitively it makes sense to think that a decline in short term rates will lead to lower long-term rates eventually.

Mixed Inflation Date: CPI vs PPI

This week saw the Consumer Price Index (CPI) come in exactly as markets expected but the Producer Price Index (PPI), measuring inflation on the wholesale/producer level, have a sharp increase. This increase was likely caused by tariffs. 

The remarkable part of these reports is how it strongly suggests that tariff costs are not being passed on to the consumer like some economists feared. The costs are being absorbed throughout the supply chain with not a great deal of pain at the consumer end. Despite the poor PPI read, markets didn’t move significantly.

July CPI Shows Modest Inflation

CPI for the month of July showed both overall and core (stripping out volatile food and energy prices) inflation increasing 0.2% for the month. The annual overall reading remained at 2.7%. There was a significant decline in energy and gasoline prices. The biggest increases in prices came from items that are weighted very low like furniture and bedding, and photographic equipment. Other items, like apparel, actually fell despite expectations from the tariffs. 

The reason inflation still remained positive was because of airline fares, used cars and trucks, and medical care costs. These three sectors accounted for all of the increase in the monthly reading while everything else accounted for only 0.07% (of the 0.2% total), a minuscule amount.

July PPI Rises More Than Expected

PPI for the month of July rose 0.9% both on the headline and core reading. The market was only expecting a 0.2% increase. Annual headline inflation rose from 2.4% to 3.3% and core rose 2.6% to 3.7%. The rate markets should have hated this, but there was a silver lining. 

There are several components in PPI that directly pass through to the Fed’s favorite inflation measure, Personal Consumption Expenditures (PCE). Those components were not very high which bodes well for the PCE report coming out later this month.

Looking Ahead

Next week isn’t a very busy news week but Friday’s speech by Fed Chairman Powell could move the needle. That forum has been used repeatedly by the Fed to signal major changes in policy:

Monday, August 18: 

• NAHB Housing Market Index

Tuesday, August 19: 

• Housing Starts and Permits

Wednesday, August 21

• 20-Year Treasury Auction
• Fed Meeting Minutes

Thursday, August 22: 

• Jobless Claims
• Existing Home Sales

Thursday, August 22: 

• Powell speaks at the Jackson Hole Symposium