Investors are taking caution ahead of the release of the next round of closely scrutinized inflation data amid the expectation of another large interest rate hike by the Federal Reserve. The upcoming consumer price index (CPI) and producer price index (PPI) releases are two of the Fed's most watched sources for judging inflation. Right now markets are pricing in a 75 basis point rate hike from the Fed, which would be its largest this year, especially after comments made by Fed Chair Jerome Powell recently.

In a Q&A presented by the Cato Institute, Powell remarked "History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done." The Federal Open Market Committee meets Sept. 20-21 and will likely vote on increasing the federal funds rate at that time.

While the Federal Reserve does not directly control mortgage interest rates, the group does influence movements in the space. For example, the latest 30-year fixed-rate mortgage average moved up to 5.89% from 5.66% the week prior, according to Freddie Mac. Economists from the GSE point to the Fed as the reason why rates continue to creep upward, saying "Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation."

Bonds rallied with the news from the Fed, although we are still in the midst of a yield curve inversion. The 10- and 2- year Treasury note yields have been inverted for more than a month's worth of trading days. An inverted yield curve, when investors are more confident in short-term versus long-term debt purchases, is typically an indicator of a recession. 

The 10-year yield is also typically indicative of where mortgage interest rates are moving. January 3 was the first day of trading this year and the 10-year yield was 1.63%. At the start of trading on September 9, the 10-year yield was at 3.28%—more than double what we saw just 8 months ago. 

HOUSING DATA: THE GOOD, THE BAD AND THE SILVER LINING

We have mentioned it a few weeks in a row now, but more data is being released showing that the housing market has peaked and is moving back toward stabilization. Black Knight's latest Mortgage Monitor report shows that home prices are not just decelerating, but rather at this point we can say they are declining. 

Black Knight Data and Analytics President Ben Graboske is quoted in the report saying, "After 31 consecutive months of growth, home prices pulled back by 0.77% in July. Annual home price appreciation still came in at over 14%, but in a market characterized by as much volatility and rapid change as today's, such backward-looking metrics can be misleading as they can mask more current, pressing realities. Case in point – this cooling has been indicated in our home price data for several months now, and at an increasing pace."

Cooling home prices are a good sign for buyers who are looking to come off the sidelines and into the market, but the interest rates we mentioned earlier are continuing to make that a struggle for many potential homebuyers. Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni noted in the MBA's latest mortgage application survey that, "With the 30-year fixed rate rising to the highest level since mid-June, application volumes for both purchase and refinance loans dropped. Recent economic data will likely prevent any significant decline in mortgage rates in the near term, but the strong job market depicted in the August data should support housing demand. There is no sign of a rebound in purchase applications yet, but the robust job market and an increase in housing inventories should lead to an eventual increase in purchase activity."

That slow grind back to more purchase activity has a silver lining: increased inventory. According to Black Knight's data as well as data from the National Association of Realtors, we are sitting at about a 3-3.3 months level of inventory. In their report, Black Knight notes that, "If sales continue to fall at the rate they have the past four months and listings continue to build at their current pace, inventory would cross the six-month threshold by December – typically the point at which the landscape shifts from a seller's to a buyer's market."