Inflation Strikes Back

Mortgage Rates Reverse Course After CPI

Rates rose this week after a hotter-than-expected Consumer Price Index (CPI) report was released. It was a shorter week, with bond markets closed on Wednesday for the Veterans Day holiday. We had a nice run of declining rates, so a pullback isn’t uncommon. Future data will indicate the direction rates take.

Rates improved from their peak on October 5th to their low on November 5th, with the conventional 30-year fixed rate dropping from slightly over 7.5% to about 7.04%.

CPI: Energy Pushes Inflation Higher

CPI for October came out slightly above estimates. There was no year-over-year figure since the government was shut down last October. Can you believe it has been a year since that disaster!

Headline CPI rose 0.4% for the month, about one-tenth of a percentage point hotter than estimates. Not surprisingly, energy prices, rising 0.7%, and gasoline prices, rising 1.0%, drove most of this increase. In the last couple of weeks, we have seen WTI and gas prices fall significantly. This could indicate tamer inflation in next month’s reading.

Core CPI: Shelter Keeps Pressure On

The important core rate, which strips out volatile food and energy prices and is the main focus of the Federal Reserve (Fed), rose 0.3%, also hotter than expected. Interestingly, shelter rose 0.3%, down from 0.4% in September, and accounted for about half of the total core inflation increase.

Waller Signals Potentially Larger Hikes

One reason the markets pushed rates higher after this release was a comment from the Fed Governor Waller. He is usually dovish (favoring lower rates), but indicated that even if inflation comes in beneath estimates, he will lean toward a 25-basis-point hike. If CPI was hotter than September, he would support a 50-basis-point increase, saying, “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”

Would a hike in short-term rates really lead to a decline in shelter costs? Not likely.

Existing Home Sales Hit Multiyear Low

Existing Home Sales were quite muted for October, likely due to higher rates. Home sales fell 5.5% to an annualized pace of 3.75 million units. This was weaker than expectations of 3.85 million and the lowest reading since 2010.

Since rates have declined about 0.5%, future reports could show a little bounce back. Inventory rose 1.3% to 1.6 million, up about 5% year-over-year. Homes remained on the market for a median of 35 days.

PPI: Revisions Offset Softer Monthly Reading

The Producer Price Index (PPI), which measures wholesale inflation, was released for October. It rose 0.3%, actually one-tenth of a percentage point lower than estimates. But an upward revision to September’s reading essentially puts us in line with expectations. Year-over-year PPI rose from 6.3% to 6.5%, the highest since November 2022.

Food prices rose 1.3%, but diesel prices did fall by 7.9%. This decline could be captured in next month’s report and could help indicate a top for PPI inflation. Core PPI was as expected, with the monthly reading rising 0.3% and the year-over-year reading remaining at 5%.

Looking Ahead: Housing, Spending, and Jobs

• Tuesday, November 17: ADP Weekly Employment Data, Retail Sales, NAHB Housing Market Index
• Wednesday, November 18: Housing Starts and Permits, Pending Home Sales, Fed Minutes, 20-Year Auction
• Thursday, November 19: Jobless Claims