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Mortgage rates continue to surge this week as more worrisome inflation data has put to rest any lingering expectations for a Federal Reserve rate cut this spring.

The rally in mortgage rates kicked off Tuesday with the release of the latest Consumer Price Index (CPI) data, which pegged annual inflation at 3.2 percent in February.

The rally gained momentum with Thursday’s release of February producer price index (PPI) data, which showed prices charged by domestic producers of goods and services rose by a seasonally adjusted 0.6 percent from January to February — twice as much as economists had expected. The 1.6 percent annual increase in the PPI was the largest since September 2023, when annual growth measured 1.8 percent.

A lender survey by Mortgage News Daily showed rates on 30-year fixed-rate mortgages surging for the fourth day in a row Thursday, climbing 8 basis points to 7.02 percent. A basis point is one-hundredth of a percentage point, and MND’s surveys show rates on 30-year fixed-rate mortgages are up 17 basis points this week.

Barometer for mortgage rates surges

Yields on 10-year Treasury notes, a barometer for mortgage rates, are on the rise this week. Source: Yahoo Finance.

Yields on 10-year Treasurys, which are a good indicator of where mortgage rates are headed next, surged 11 basis points Thursday, to 4.30 percent, up 21 basis points from Friday’s close.

In their December summary of economic projections, Federal Reserve policymakers signaled that they expect to cut rates three times this year. While bond market investors had expected those cuts might come as early as May, the latest economic data has investors taking those bets off the table.

The CME FedWatch Tool, which tracks futures markets’ expectations of the Fed’s next moves, shows investors on Thursday see only a 4 percent chance of a Fed rate cut in May, down from 38 percent on Feb. 13. Futures markets on Thursday were still pricing in a 63 percent chance of one or more rate cuts by June 12, down from 82 percent on Feb. 14.

A Thursday report from the Department of Labor showing a drop in weekly unemployment claims could also be a worry for hawkish Fed policymakers, as strength in the job market provides support for wages and employers continue to struggle to fill many openings.

While a Commerce Department report Thursday showed retail sales picked up by less than expected in February, many Fed policymakers have expressed more worries about taming inflation than the prospect of a recession.

Chris Lowe

“When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time,” FHN Financial Chief Economist Chris Low told Reuters.

Forecasters at Pantheon Macroeconomics, who until now have been sticking to their prediction that the Fed would start cutting rates in May, threw in the towel Thursday.

In a note to clients, Pantheon Chief Economist Ian Shepherdson said the PPI data point to stronger growth in the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index.

The PCE index has been trending down toward the Fed’s 2 percent inflation target, dropping to 2.4 percent in January.

Pantheon expects that February core PCE, which excludes volatile food and gas prices, will show improvement from January when the numbers are released on March 29. Core PCE, which can be a more reliable indicator of underlying inflation trends, registered 2.8 percent annual growth in January.

Ian Shepherdson

But the expected 0.37 percent month-over-month increase in February core PCE “is nonetheless disappointing, and it reduces the chance of the Fed easing in May to the point where we are pushing back our forecast [for the first Fed rate cut] to June,” Shepherdson wrote.

Mortgage rates on the rise again

Loan lock data tracked by Optimal Blue, which lags by a day, showed borrowers were locking in rates on 30-year fixed-rate mortgages Wednesday at an average rate of 6.76 percent. That’s up 6 basis points from Monday and 26 basis points from a 2024 low of 6.50 percent registered on Feb. 1.

While Optimal Blue data shows rates are creeping back toward a 2024 peak of 6.93 percent registered on Feb. 28, they have a ways to go before returning to the 2023 high of 7.83 percent registered on Oct. 25.

The rates reported by Mortgage News Daily (MND) tend to be higher than Optimal Blue’s because the MND index is adjusted to estimate the effective rate borrowers are offered, regardless of what points they’re willing to pay. Optimal Blue uses contracted rates provided for rate locks, even if borrowers have paid points to get a lower rate.

Demand for purchase mortgages had picked up last week for the second week in a row, reversing consecutive weeks of consecutive declines as would-be homebuyers took advantage of falling mortgage rates.

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