Author: Eric BernsteinPublished:
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Markets Were Unaffected by PCE Inflation Report
PCE inflation came in hotter than the Fed wanted to see, with headline inflation rising 4.1% year-over-year and core PCE climbing to 3.4%, the highest core reading since October 2023. At first glance, that’s bad news for mortgage rates because it keeps pressure on the Fed to stay hawkish and leaves a September rate hike on the table. But the report wasn’t quite as ugly under the hood. A big chunk of the inflation came from energy prices tied to the Middle East conflict, which could ease if oil prices continue falling after the preliminary U.S.-Iran peace deal.
Services inflation was also elevated, but some of that came from financial services and insurance, including portfolio management fees, which rose because the stock market rallied. That matters because stock-market-driven portfolio fees are not the same as broad, sticky inflation hitting everyday consumers. So yes, inflation is still too high and the Fed still has a problem, but not every piece of this report points to lasting price pressure. If energy cools and the stock-market-related bump fades, May may end up being close to the peak.
All Eyes Are Still on Iran
All eyes are on Iran and oil prices right now. Last week’s inflation report was ugly, but a major reason inflation moved higher was the spike in energy prices caused by the war in the Middle East and disruption around the Strait of Hormuz. Oil prices started to cool late last week as more tankers moved through the strait, with WTI crude even falling back below $70/barrel for the first time since the day before the war began. But that progress got tested quickly over the weekend after renewed U.S.-Iran strikes reignited fears that the ceasefire could fall apart and that oil shipments could be disrupted again.
The good news is that both sides appear to be pulling back from the edge, at least for now. U.S. and Iranian officials reportedly agreed to halt strikes and meet this week to work through the dispute over the Strait of Hormuz. That meeting matters a lot for inflation and mortgage rates. For inflation to really cool — and for mortgage rates to move meaningfully lower — we need more than a temporary pause in fighting. We need a long-term peace agreement that keeps the Strait open and lets oil prices fall back to where they were at the beginning of the year, under $60/barrel. Until then, every flare-up in the region risks pushing oil prices higher again, feeding back into inflation, and making it harder for the Fed to justify cutting rates.
What to expect this week?
This is a huge week for mortgage rates, and it really comes down to two things: the labor market and Iran. Last week’s inflation data kept pressure on the Fed, but if the labor market shows signs of weakening, markets could still push rate-cut expectations higher. At the same time, every headline out of Iran matters because oil prices are now one of the biggest drivers of inflation — and inflation is still the biggest obstacle to lower mortgage rates.
Tuesday starts with home price data, consumer confidence, and job openings. The job openings report will be the first major labor-market test of the week, with markets looking to see whether hiring demand is still holding up or starting to crack.
Wednesday brings ADP employment, manufacturing data, construction spending, auto sales, and a speech from Fed Chairman Kevin Warsh. ADP is not always a perfect predictor of the government jobs report, but it can still move markets if it comes in far above or below expectations. Warsh’s comments will also matter, especially if he gives any hint about how the Fed is balancing high inflation against a potentially slowing labor market.
Thursday is the big day. Markets get the June jobs report, unemployment rate, wage growth, jobless claims, and factory orders all in one morning. A strong jobs report could push mortgage rates higher because it would give the Fed less reason to cut. A weaker report could help rates fall by showing that the economy is slowing enough for the Fed to consider easing, even with inflation still elevated.
Friday is the July 4th holiday. Markets are closed.
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