Cooler Inflation Pushes Odds of a Rate Hike Lower

Inflation Cools, But Oil Remains the Wildcard

July’s inflation data was encouraging. CPI rose just 0.1% for the month, putting annual inflation at 3.4%, while core inflation rose 0.2% and slowed to 2.5% annually. Core inflation is now roughly back where it was before the Iran conflict began, and shelter costs remained relatively tame. That’s a meaningful step in the right direction after months of inflation concerns, and something the Federal Reserve wanted to see.

PPI was even better. Wholesale prices were completely flat in July versus expectations for a 0.2% increase, while core PPI rose 0.2%, also below expectations. Goods prices fell 0.7%, helped by declines in both energy and food. The biggest question now is whether that progress can continue as the situation with Iran unfolds. Oil is hovering around $83 per barrel, and ideally, prices go back below $75 and stay there. Lower oil would make it much easier for inflation to keep cooling.

For mortgage rate outlook, this was a good week. A few weeks ago, a rate hike in september was overwhelmingly likely to happen. Now, it's just a 30% chance. Softer CPI and PPI data reduce inflation pressure and give markets more reason to believe the Fed can eventually move toward easier policy. But energy remains the wildcard. If oil falls and stays below $75, that could create another leg lower for inflation and mortgage rates. If oil jumps again, some of this progress could quickly be undone.

Retail Sales Drop

Retail sales added another piece of good news for rates. Sales fell 0.6% in July versus expectations for a 0.1% increase, while the “control group” that feeds directly into GDP fell 0.4%, its first decline of the year. Some of the weakness can be blamed on Amazon moving Prime Day into June, but the broader trend is harder to ignore: consumer spending momentum has cooled sharply over the past several months. Combined with weaker labor data and better CPI and PPI reports, the case for the Fed raising rates again is getting much weaker. For mortgage rates, a slowing consumer is another sign that the economy may finally be losing enough steam to keep pressure on Treasury yields and borrowing costs moving lower.

Existing Home Sales Slip

Existing-home sales slipped 1.7% in July to a 4.06 million annual pace, but the housing market continues to look more stable than the headline suggests. Sales are still up 2.4% year-to-date, inventory remains relatively healthy at 4.6 months of supply, and the median existing-home price rose 2% from last year to $434,100. There are also big regional differences: sales rose in the Northeast, were flat in the West, and fell in the Midwest and South. The bigger takeaway is that buyers are still participating despite elevated borrowing costs, and NAR estimates the market would be considerably stronger if mortgage rates can get back closer to 6%.