As I have mentioned several times over at the Florida Mortgage Report, and in my Mortgage Market Updates here, inflation was bound to return while the Fed kept cutting rates, basically appeasing the markets.
Today’s PCE numbers, which are the Fed’s favorite gauge on inflation, came in with an all important year over year number of 2.2%. Since the Fed’s "comfort zone" is between 1 and 2%, the Fed has got to be second guessing their direction now.
Remember that I warned that the PCE, while in the "comfort zone" the last time, it had ticked higher and came in at 1.9%. Going from 1.9% to 2.2% is a pretty significant move and begs to question what the next numbers will be. Granted a lot has to do with food and energy, the recent bond movements higher were not truly justified overall.
Mortgage bonds are back down below their 25-day MA, maybe for good this time, but "emotions" may overrule logic as they typically do (and have been). Only time will tell for sure where bonds end up, but remember that if they drop, mortgage rates rise.
On another interesting side note, Americans dramatically increased their spending even though their income dropped slightly. While not a major player, to me it shows that Americans love extending their "credit", especially when rates have been lowered on credit cards, HELOCs, etc. Never a good thing in my own opinion, so watch out.
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Inflation is a concern, but don’t be fooled that it is a direct fed response. Much of our current inflation is driven by commodities which are being driven up artificially by this ethanol craze and seriously by China and the Middle East (metals, oil, etc).
Jonas - Actually, the Fed’s moves play a major role in inflation. The reduction of rates inspires more use of credit and their “added liquidity” throws more money out there eroding the dollar. The effect is increased inflation.
Part of the reason oil is so high is due to the devalued dollar, which was caused by the Fed’s actions.
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