Steady Inflation

Mortgage markets were relatively quiet this week, as the major economic events caused little reaction. A highly anticipated speech from Fed Chair Warsh avoided new forward guidance on monetary policy, the latest inflation data matched expectations, and mortgage rates finished slightly lower.

Over the past few months, long-term bond yields, including the yields that influence U.S. mortgage rates, have been moving higher around the world. For example, Germany's bond yields recently reached their highest levels since 2011, while Japan's climbed to their highest level in 30 years. There are several reasons behind the broader rise. First, inflation remains elevated in many countries, and higher oil prices since the start of the conflict in the Middle East have added inflationary pressure. When investors expect inflation to remain higher, they typically want a larger return on their investments to protect their purchasing power. Second, investors are keeping a close eye on government spending. Governments around the world are running large deficits and need to issue more debt to fund them. With more bonds competing for money from investors, yields generally need to rise to attract buyers. Another factor is the huge amount of money being invested in artificial intelligence. Technology companies are spending heavily to build AI infrastructure, increasing their need for capital. That means they are also willing to offer higher returns on corporate bonds to attract investors. Put it all together, and there's a lot of demand for investor capital at the same time that the supply of bonds is increasing.

Speaking from the Jackson Hole economic summit on Friday, Fed Chair Warsh expressed concern about elevated inflation levels while avoiding forward guidance on changing the federal funds rate. He noted that recent data did not tell him that underlying inflation trends "have meaningfully improved." While suggesting in general terms that tightening may be necessary if inflation does not come down "at sufficient speed," he did not elaborate on the specific economic signals which would determine policy changes. 

Looking ahead, attention will remain fixed on the conflict in the Middle East. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, The ISM national manufacturing sector index will be released on Tuesday and the services sector index on Thursday. JOLTS also will come out on Tuesday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.