Thursday 8/14 ... A Great and Paradoxical day.

Today saw the release of the much anticipated CPI report.  (consumer price index).  This is one of the most closely watched gauges of inflation.  As we have discussed in the past, rising inflation is not good for mortgage rates as it erodes the value of MBS.  So when inflation goes up, rates tend to go up too.

The consensus among economists for the CPI report today was for a .2% increase at the "core" level, which excludes food and energy prices.  The index tracks both the "headline" and the "core," because food and energy prices tend to cause the headline to be very volatile.  

The core rate rose today by .3% as opposed to .2%.  Also the headline reading was higher than anticipated .4% coming in at .8%.  This should have been very bad for rates, notwithstanding the supportive news (weak jobs data), but it was not.... Why?

Some of you may have heard reference to the recent decline in commodities indexes.  In fact certain indexes have fallen at record paces.  Commodities encompass food, energy, metals, oil, etc...   It is thought by many that commodities are one of the best indicators of future inflation pressure.  Whether that's true or not, the markets certainly seem to think so as they paid little to no heed to the inflation data.  Certainly week jobs numbers helped, but we almost never see rates go down on bad inflation data.

But since the consensus seems to be that the drop in commodities prices will ease inflation in the months to come, rates improved, treasuries improved, stocks improved, and the spirits of all of us with floating interest rate decisions improved.

But we are not "out of the woods" with respect to our longstanding discussion of mid-summer being historically the lowest point in the year for mortgage bond pricing (highest rates).  However, we are seeing some reassuring signs (which always seems to correspond with the market throwing curve balls!).  So whatever you do with respect to locking or floating, just remember, you will almost always regret floating when you should have locked more than locking when you should have floated.

Tomorrow has a medium high level of data, the most important of which being the Consumer Sentiment report.  This rose last month after severe declines.  It is forecast to rise just slightly again, so it should prove to be very good news for bonds when (uh.... I mean if :-0) it declines again.  A bit of a quandary really as I'm sure most Americans would like sentiment to be positive, but most of us that are hoping for low interest rates want sentiment to be absolutely horrible.  Don't worry.  It doesn't make you a bad person, just utilitarian.  And you can always go back to hoping for the best after you lock!