Higher Inflation

It was another volatile week for mortgage markets, mostly due to the events in Ukraine. The daily movements were offsetting, however, and mortgage rates ended the week with little change, remaining at the highest levels since the middle of 2019.?

Headlines about Ukraine continued to influence mortgage rates this week, especially the invasion on Thursday. When tensions increased, investors reduced risk by shifting from stocks to relatively safer assets such as bonds. This increased demand for mortgage-backed securities (MBS), which was favorable for mortgage rates. News which hinted at reduced tensions had the opposite effect.?

The PCE price index is the inflation indicator favored by the Fed. In January, core PCE was 5.2% higher than a year ago, up from 4.9% last month and the highest annual rate since 1983. For comparison, readings were below 2.0% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as pandemic-related disruptions are resolved.?

Sales of new homes fell 5% in January to an annualized rate of 806,000, which was close to the consensus forecast. New home sales peaked at a rate of 993,000 units in January of last year, which was the highest level since 2006. The median new home price was 13% higher than last year at this time at $423,300. The backlog of new homes approved for construction but not yet started rose to a record high of 26%. Higher prices and shortages for key inputs such as lumber and appliances restrained the pace of building.?

Looking ahead, investors will closely follow news on Ukraine and will look for additional Fed guidance on the pace of future rate hikes and balance sheet reduction. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national manufacturing index will come out on Tuesday and the ISM national service sector index on Thursday.???