Just as mortgage rates threatened to reach their highest point since the Iranian conflict began, they were granted a reprieve.
This time, it was a cooler-than-expected CPI report that saved the day.
Prices actually fell 0.4% month-to-month in June, which was the best reading since April 2020.
While it was mostly tied to lower energy prices, core CPI that excludes food and energy was also better than expected.
Together, this could mean the Fed can take a longer wait-and-see approach and mortgage rates might avoid a dreaded 7-handle.
Another Day, Another Twist for Mortgage Rates
It’s been a rocky road for mortgage rates since late February, with lots of ups and downs and uncertainty about their near-term direction.
The main culprit has been the conflict with Iran, which has led to a spike in energy prices and resurging inflation.
But the June CPI report released today showed a surprising drop in consumer prices, led by a pullback in energy prices.
If the energy spike does prove to be transitory, perhaps inflation isn’t as bad as feared.
Prices were down 0.4% during the month, the biggest drop since April 2020, pushing CPI down to 3.5% year-over-year from 4.2% previously.
The consensus was a 3.8% annual increase so it was a beat there and a beat on the 0.4% price drop, which was only expected to be a 0.2% drop.
It wasn’t just energy leading the way though. Core CPI, which excludes energy and food prices, was unexpectedly flat in June, below its forecast to rise 0.2%.
That pushed Core CPI down to 2.6% YoY, below the previous reading of 2.9% and the median forecast of 2.9%.
Long story short, it was a surprisingly good report that could ease pressure on the Fed to hike rates in order to control inflation.
Does This Give the Fed More Time to Wait and See?
One takeaway from this report is that the Fed can now be more patient.
In other words, they won’t need to hike right away because of surging inflation.
Instead, they can say Hey, things are looking better, the oil surge has cooled off, let’s see how this goes.
Had prices kept rising, they may have had to act, aka hike, quickly to avoid further price pressures.
While the Fed doesn’t set mortgage rates, expectations of future hikes and cuts can play a big role.
If there’s the threat of hikes, mortgage rates may rise ahead of such a decision.
The opposite is also true, which is why mortgage rates fell a ton leading up to the first rate cut back in September 2024.
So if you want lower mortgage rates, hope the data continues to come in cold to give the Fed more excuses not to hike.
Simply staying put could be enough to see 30-year fixed rates ease and fall back toward those nice sub-6% levels from the end of February.
Avoiding a Return to 7% Mortgage Rates
This report could prove to be key to keeping mortgage rates below the psychologically damaging 7% level.
Had it come in hot, pressure would have ratcheted up on bond yields, which were already above 4.60% yesterday on renewed tensions in the Middle East.
With the 30-year fixed matching its war-time high of 6.75%, a new high could have materialized had this report not surprised on the downside.
Perhaps we’d be at 6.875% today had we gotten a hot report, with a 7-handle a possibility next. Instead, disaster was averted and mortgage rates will see some relief today.
Still, the bigger picture remains murky. If this proves to be a one-off and inflation climbs higher next month and beyond, mortgage rates could test new highs.
So be grateful for this CPI report, but know it’s just one report and we’ll need to see a trend to ensure we’re out of the woods.
