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Market Update

From the Desk of Jason Obradovich, Chief Investment Officer

Perhaps Higher For Longer

Hello everyone. Welcome back to the Mortgage Rundown. Today we are going to talk about what’s happening with interest rates.

Well here we stand, just a few days away from the next CPI report and the Federal Reserve meeting with great anticipation. Will inflation continue to moderate in line with the Fed’s expectations or will we see the FOMC raise the key benchmark rate one more time. The implications of the inflation data and Fed decision are gigantic.

One thing is for sure and that is the fact that the market is finally pricing in stubborn inflation versus just a few months ago with pricing in a rapidly approaching recession. If you look at the chart on your screen you can see that medium term interest rates have popped up about 70bps since hitting the bottom on May 3rd.

The excitement over the FOMC lowering interest rates for the remainder of the year is over and now the market is pricing in a 30% chance the Fed raises rates ¼ of a percentage point next week and a 50% chance they raise ¼ of a percentage point by July’s meeting.

Getting back to inflation, next week the market is expecting the headline annual inflation rate to drop from 4.9% down to 4.1%, which is a pretty large drop. However if you exclude food and energy, the expectation is that it will drop from 5.5% to 5.2%, which is a decent drop month over month.

If for some reason inflation doesn’t drop down to 5.2% or the headline number doesn’t move much below the 4.9% rate, then we could see interest rates rise further. On the other hand if the CPI number excluding food and energy is below 5.2% then we could see rates really come down as the market shifts their expectations that the Fed’s job is closer to being done.

That’s it everyone from the capital markets desk this week. Thank you all for watching, have a great day.

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