Major Inflation Report Not Bad for Rates

March CPI Driven by Energy Prices

The Bureau of Labor Statistics (BLS) released the March Consumer Price Index (CPI) on Friday. The headline read that inflation rose 0.9%, which is very hot. It was mainly due to the increase in energy prices from the Iran conflict. Markets were expecting this exact number and that caused rates to remain relatively flat. Gasoline prices rose 21% due to the closing of the Strait of Hormuz. 

Core CPI Shows Shelter Moderation

The Core CPI reading (stripping out volatile food and energy) rose 0.2%. This was slightly lower than the 0.3% expected. The biggest component of this report is the shelter section. It is continuing to show moderating prices. Rent prices show an annualized rate of 2.3%, which is getting closer to the real-time rate of 1%. As the shelter lag continues to “catch up,” Core Inflation will continue to improve. 

Mortgage Rates Improve from Recent Highs

Mortgage rates are significantly better than the highest point that was reached on March 27. Rates have improved slightly, coming down about 0.25%–0.375% from their recent peak. While that’s better than the highs, they are still above the lowest levels we saw on February 27, before the Iran conflict.  

Currently, mortgage rates are sitting slightly below their 200-Daily Moving Average. That is the 200-day average of all rates. This acts as a technical ceiling and barring any negative press about the Iran conflict could bode well for continued rate improvement next week. 

February PCE Reflects Pre-Conflict Data

The Federal Reserve’s (Fed) favorite inflation measure is Personal Consumption Expenditures (PCE). February’s PCE was released this week. It contains old information it’s still lagging fromthe government shutdown. It was also data prior to the Iran conflict.  Headline inflation rose 0.4% and the annual rate was 2.8%, which was unchanged from the previous report. Core PCE, which is the main target of the Fed, rose 0.4% as well. And, the yearly number fell from 3.1% to 3.0%, as expected.   

ISM Services Index Signals Business Strain

The Institute for Supply Management (ISM) released their Services Index for March. This measures the largest sector of the US Economy: the Services Business.  Worse than the estimations, the index fell from 56.1 to 54. The rise in oil prices from the Iran conflict caused a strain on business. The ISM Prices Index surged to 70.7%, the highest since October 2022.The employment component was the weakest since December 2023. This is very different from the picture painted by the BLS in last week’s report, which showed 178,000 jobs were created. 

Looking Ahead: What to Watch Next Week

Next week is lighter on major economic releases that impact rates. 

• Monday, April 13: Existing Home Sales 

• Tuesday, April 14: ADP Weekly Employment Data, Producer Price Index (PPI) 

• Wednesday, April 15: NAHB Housing Index, Fed’s Beige Book 

• Thursday, April 16: Jobless Claims, Industrial Production and Capacity Utilization