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Positive inflation data helping hold rates steady

By: Movement Staff
May 12, 2023

Inflation continued its snail-like slowdown in April with both the consumer price index (CPI) and producer price index (PPI) coming in lighter than expected. The Labor Department's CPI report on May 10 showed a 4.9% annual increase, against expectations of a 5% increase. The same agency's PPI report the following day showed an increase of 2.3% year-over-year. That's lower than March's 2.7% reading and the lowest reading for the PPI since January 2021.

The CPI and PPI are important to the Federal Reserve and investors on Wall Street because they measure the cost of goods for consumers like you, and also the cost for wholesalers to produce those goods. As those move lower, especially right now, that gives investors hope that the Fed's quantitative tightening measures (like increasing the federal funds rate) are working to slow the economy. 

The 10-year Treasury note yield dipped significantly on Thursday in reaction to the more positive cooling inflation data, which is good news for mortgage rates. The 10-year yield is also known as the benchmark Treasury note yield and is regularly used as an indicator of investor sentiment. 

When we see yields move higher, that generally means investors are looking for higher-risk/higher-reward types of investments because they don't have faith in the long-term economy. When yields move down, that indicates more positive long-term sentiment. Mortgage rates are long-term investments (think 30-year fixed rate) and typically follow the trajectory of the 10-year yield. That's why we discuss the 10-year yield every week because it's one of the best pieces of economic data to track to follow what rates are doing. 

Positive inflation data helping hold rates steady


The Federal Housing Finance Agency made the biggest waves in the housing industry this past week by rescinding its upfront fees based on borrower debt-to-income (DTI) ratios. The implementation of the fees was delayed in March due to heavy pushback from the mortgage industry. The fees (also known as loan level pricing adjustments, or LLPAs) would have been applied to conventional mortgage borrowers with DTI levels at or above 40%. 

This was a welcome relief to many originators who had argued the fees would make loan origination essentially impossible to implement logistically. There was also quite a bit of heated controversy in the public arena that the new rule would hit well-qualified borrowers with unnecessary punitive fees. 

Borrowers remain extremely rate sensitive at this time with any dip in rates spurring a flurry of activity. The Mortgage Bankers Association reported a seasonally adjusted 6.3% week-over-week increase in mortgage activity for the week ending May 5. That was the week that saw the 10-year Treasury note yield drop significantly after the Fed's interest rate hike announcement and the collapse of yet another bank. The MBA's report showed purchases were up 5% week-over-week. 

Freddie Mac's 30-year fixed-rate mortgage average barely shifted week-over-week, falling just 0.04% to 6.35%, but the encouraging part is exactly what Freddie's analysts noted in their report. They said, "This week's decrease continues a recent sideways trend in mortgage rates, which is a welcome departure from the record increases of last year. While inflation remains elevated, its rate of growth has moderated and is expected to decelerate over the remainder of 2023. This should bode well for the trajectory of mortgage rates over the long-term."

Author: Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.