Market Update: Rates Fall with Cooling Inflation Levels; What Will Existing Home Sales Do This Week?

Blog posted On July 17, 2023

Mortgage rates surged higher two weeks ago after economic reports suggested the economy is stronger than expected. Last week’s reports told a different tale. The main economic report last week was the consumer price index (CPI), which measures inflation. Upon release, this report showed that inflation was falling faster than expected. Inflation is a key factor that influences bonds (bonds hate inflation), and bonds influence rates. So the lower-than-expected CPI data was welcome news for rate trends, resulting in a full recovery from the week before. Though it’s only one month of data, it’s promising for a few reasons.

Inflation levels show promising signs for rates

Inflation has been a closely watched data point for the past two years, and arguably the most influential factor on recent rate trends. Experts and others hoping for lower rates have been waiting for last week’s news. CPI data has been below expectations in previous reports, but last week was different. Last week was a sort of breakout from the stubbornly high inflation levels. In fact, the core CPI index, which strips food and energy costs, was at the lowest level since early 2021.

Will the Fed continue to raise rates?

While inflation data looks promising, core inflation is still much higher than the Federal Reserve’s target level of 2%. In fact, “it will take another year of reports like the one we just saw before we're back in that range,” as Matthew Graham of Mortgage News Daily puts it. So now the Fed has to decide if the current level of the benchmark interest rate is high enough to get us to our 2% goal or if it needs to make additional hikes.

Coming up this week…

This week is part of the blackout period leading up to the Federal Open Market Committee (FOMC) meeting on July 25-26. That means that Fed members refrain from commenting on potential policy moves or influences. During blackout periods, the market can go a little stir crazy trying to figure out what the Fed is going to do in response to important economic reports. However, this week doesn’t have any big hitters like the CPI or jobs reports, so it’s likely things will be smooth sailing for the most part.

In housing news, we have several reports headed our way:

• Tues: National Association of Home Builders’ (NAHB) housing market sentiment index
  • Gives us an idea of builders’ outlook on the housing market; the higher the better
• Weds: Housing starts and building permits
  • Gives us an idea of the number of new homes that will be coming to the market in coming months; also has housing completion data
• Thurs: Existing home sales
  • The number of existing homes on the market – total, and the percent change from the previous month. Hoping for positive percentage & more homes on the marke

We’ll keep you posted on the updates. Until then, let us know if you have any questions!

Sources: Bloomberg, Mortgage News Daily