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2017-09-13 10:29:46

Mortgage Rates opened today slightly higher after hitting 2017 low yields last week.


The U.S. 10yr Note is trading @ 2.18% up from 2.01% just last Thursday.   North Korean tensions and hurricane’s Harvey and Irma put bond traders on the defensive last week, buying bonds as uncertainties surrounding these events increased.


North Korea did not test another missile over the weekend and hurricane Irma damage estimates look to be much lower than originally forecasted.  Traders on Monday began reversing their long positions and quickly sending 10yr Note yields 15bps higher.


This morning we received our first piece of critical inflation data for August.  The Producer Price Index (PPI) for August rose 0.2% from the previous month.   Year over year PPI came in at +2.4%, which is a major relief for the Federal Reserve which is hoping for inflation over 2%.  PPI measures prices at the producer level before they are passed along to final consumers.  By tracking price pressures in the pipeline, Investors and economists can anticipate inflationary consequences in the coming months.  (See PPI Chart Below)


Tomorrow we get the second gauge of August inflation, this time on the consumer level.  The Consumer Price Index (CPI) is released tomorrowmorning @ 8:30am.  Economists surveyed are expecting a month over month rise of 0.1% and a year over year change of 1.9%.   (See CPI Chart Below).


Inflation has been the main story of the year thus far.  Since Trump won the election inflation expectations were increased across the board on the hopes of tax cuts, infrastructure spending, and deregulation.  So far the Trump administration has yet to make any material headway on these issues and markets quickly reversed their growth expectations sending Mortgage Rates to post election lows last week. 


Inflation has been stubbornly low for a long time.  The economy continues to create new jobs but we have yet to see higher wages which is the main driver of consumer spending and ultimately higher inflation.  The Federal Reserve wants to hike rates again this year, probably at their December meeting, but they need to see inflation rise above 2% to justify the hike.


The next Federal Reserve meeting is on Wednesday September 20th.    Economists see no chance the Fed will raise rates next week.  Fed Fund Futures are currently trading at only a 1% probability they raise rates next Wednesday.  The probability the Fed raises rates at their December meeting currently stands at 46%.  Next week’s Fed meeting will be centered around the balance sheet and how the Fed will begin to implement their reduction starting October 1st.   Markets have been given advance notice for the balance sheet reduction so I don’t expect much volatility surrounding the meeting unless they decide to increase or decrease the amount they will reduce its month.


More market updates to follow.


Have a great day!



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