While there’s not much to report on the mortgage rate front today, this week is setting up to be pretty important with both CPI and PPI being released.
The bond market is closed for Columbus Day, but had it been open, we might have seen another big jump in yields related to ongoing tensions in the Middle East.
There was a Houthi attack on Saudi Arabia over the weekend, this time hitting Riyadh’s King Khalid International Airport.
That all points to continued problems as opposed to any sort of peace talks to cool things down.
As such, pressure will remain high on oil prices and inflation, which can also push mortgage rates higher until there’s some sort of resolution.
More Middle East Tensions with CPI Report on Deck
It was more of the same over the weekend. A ratcheting up of tensions in the Middle East, with the Houthis attacking Saudi Arabia’s airport.
The widening Middle East conflict seems like it’s not going to abate anytime soon, which will continue to act as a headwind for both energy prices and mortgage rates.
Those events pushed oil prices higher today, and higher oil prices typically correlate with higher bond yields (and mortgage rates).
So perhaps it’s good news that the bond market is closed today to give the market a little more time to digest it.
But I wouldn’t be surprised if bond yields gap higher tomorrow once traders get back to their desks.
For now, the 10-year yield remains around 5.25%, and that combined with a 225-bps spread gets you right around 7.5% for a 30-year fixed.
On Wednesday we’ll have another CPI report to parse as those higher energy prices seep into all corners of the economy, beyond just the pump.
[Compare mortgage rates and payments with my mortgage rate calculator.]
Headline CPI Will Look Ugly, But We Already Know That
The September CPI is expected to show prices up about 0.6% for the month, which would push the annual rate to around 3.7% from 3.4%.
That’s mostly due to higher gas prices, which as mentioned have surged thanks to the war.
But the bond market pretty much already knows that and has it priced in. Nobody’s going to be shocked that inflation is higher with oil above $100 a barrel.
What they’ll care about is the core number, which strips out food and energy.
It’s forecast to rise just 0.2% on the month, down from 0.3% in August, and climb from 2.4% to 2.5% annually.
If we meet forecast, it’ll give bond investors some confidence that higher energy costs aren’t bleeding into everything else.
If it comes in hot, then there’d be worries bond yields (and mortgage rates) could climb even higher than they already are.
This is that double top in mortgage rates I’ve talked about previously, where they could rise back above 8% and hit new cycle-highs.
It also happens to be the last inflation report before the Fed’s next meeting in late October, where the odds of another hike currently sit sub-20%.
Cool Core CPI Could Build on Momentum From Last Week, But Watch Out If It Comes in Hot
It’s all pretty straightforward here.
If core CPI comes in at forecast or lower, bond yields could ease a bit and bring mortgage rates down with them.
That’d be a nice momentum move with rates already around two-week lows thanks to that strong bond auction last Wednesday.
It seems bond investors finally got interested again with yields at the highest levels in years.
However, if we get a hot reading it could send the 10-year right back toward that recent peak of 5.35% and beyond.
That would put mortgage rates at around 7.625% or higher, and set the stage for a move back to the 8s if more of the same was expected.
So core CPI is the number to watch this week if you’re wondering where mortgage rates go next.
Read on: How are mortgage rates determined?
(photo: Eden, Janine and Jim)
