Just as mortgage rates threatened to hit their highest point since the Iranian conflict began, they got a reprieve.
This time, it was a cooler-than-expected CPI report that saved the day.
Prices actually fell 0.4% month-on-month in June, which was the best reading since April 2020.
While most were tied to lower energy prices, the core CPI excluding food and energy was also better than expected.
Together, this could mean that the Fed could take a long wait-and-see approach and mortgage rates could avoid the dreaded 7 handle.
Another Day, Another Real Estate Rate Twist
It’s been a rocky road for mortgage rates since late February, with many ups and downs and uncertainty about near-term direction.
The main culprit has been the conflict with Iran, which has led to higher energy prices and higher inflation.
But the CPI report for June released today showed a surprising drop in consumer prices, led by a decline in energy prices.
If the power surge proves to be fleeting, perhaps inflation is not as bad as feared.
Prices fell by 0.4% during the month, the biggest drop since April 2020, causing the CPI to fall to 3.5% year-on-year from 4.2% previously.
Consensus was for a 3.8% increase in the year so it was a beat there and down from a 0.4% drop in prices, which was expected to be down 0.2%.
It wasn’t just the best power though. Core CPI, which excludes energy and food prices, was unexpectedly flat in June, below its forecast for a 0.2% rise.
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 positive report that could ease pressure on the Fed to raise rates 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 the patient.
In other words, they won’t have to go up as quickly because of inflation.
Instead, they can say Hey, things are looking better, the oil boom has cooled, let’s see how this goes.
If prices continued to rise, they needed to act, or rise, quickly to avoid further price pressures.
Although the Fed does not set mortgage rates, expectations of future hikes and cuts can play a big role.
If there is a threat of escalation, the loan rates may increase before such a decision.
The opposite is also true, which is why mortgage rates have fallen by a ton leading to a reduction in the first rate in September 2024.
So if you’re looking for lower mortgage rates, hopefully the data continues to come in cold to give the Fed more excuses not to hike.
Just staying put may be enough to see 30-year fixed rates ease and return to those lows of less than 6% since the end of February.
Avoiding Returning To 7% Mortgage Rates
This report could be the key to keeping mortgage rates below the mind-numbing 7% rate.
Had it been hot, pressure would have mounted on bond yields, which were already above 4.60% yesterday amid renewed tensions in the Middle East.
With the 30-year constant matching its wartime high of 6.75%, a new high would have been possible had the report not surprised on the downside.
Maybe we would be at 6.875% today if we got a hot report, maybe 7 handles next. Instead, disaster was averted and loan rates will see some relief today.
Still, the big picture remains bleak. If this turns out to be a one-off and inflation moves higher next month and beyond, mortgage rates may test new highs.
So appreciate this CPI report, but know that it’s just one report and we’ll need to see the trend to make sure we’re out of the woods.
