Consumer Price Index

“Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair.” (Sam Ewing) When following the direction of interest rates, one only has to follow the direction of inflation. If inflation is moving higher, rates are going higher. The opposite is also true.

Lately, there has been a growing fear that inflation is threatening to rise due to our tight labor market, strong economy and rising wages. It was this fear that pushed rates higher over the past month, culminating with rates hitting their highest level in over 7 years this past Tuesday.

But come Thursday, the bond market had reason to breathe a sigh of relief when the September Consumer Price Index (CPI) was reported lower than expectations. Remember, low inflation is good for the bond market and home loan rates.

It was just last month that the Fed forecasted consumer inflation to remain near current levels through 2021. If this comes to pass, long-term rates like home loan rates can’t rise too much.

Also helping rates improve from the worst levels of the week was a 1,400+ point selloff in Stocks between Wednesday and Thursday. Generally speaking, when investors sell Stocks they park some of those investment dollars into Bonds.

Bottom line — home loan rates, while elevated since earlier this year, remain historically low, especially when you consider how well our economy is performing.

The upcoming week will bring some key economic data that includes the closely watched Retail Sales Report for September. The markets will be watching this report to gauge the health of consumer spending as we head into the all-important holiday shopping season. Consumer spending makes up 70% of Gross Domestic Product (GDP), so it is important to follow.

Corporate earnings season officially kicks off this week as the markets will be informed if the recent tariffs have impacted earnings. The forecast for earnings growth for S&P 500 companies will increase 21% in the third quarter of 2018, following 24% and 26% growth in the first and second quarters.

We had an early taste on Friday when J.P. Morgan Chase Bank and Wells Fargo both posted good earnings.

In addition to the earnings, the statements from corporations regarding the outlook for the future will be closely watched. If earnings and forward guidance are solid, it could push Bond prices lower, rates higher, while giving a boost to Stocks. Again, the opposite is also true.

One thing is for sure — volatility is back and something to consider in the weeks ahead.

Key Economic Reports This Week:

  • The Retail Sales report will be delivered on Monday.
  • The NAHB Housing Market Index will be reported on Tuesday, with Housing Starts and Building Permits on Wednesday and Existing Home Sales on Thursday.
  • Manufacturing data will be seen from Monday’s Empire Manufacturing Index followed by the Philadelphia Fed Index on Thursday.

If you or someone you know has any questions about home loan rates, please give me a call. I’d be happy to help.

Source: Vantage

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