This week's highly anticipated inflation data was roughly in line with expectations and had little impact. An increase in tensions with North Korea was positive for mortgage rates early in the week. However, stronger than expected manufacturing data had an offsetting effect on Friday. As a result, mortgage rates were little changed, remaining near the best levels of the year.
Investors were most focused on the inflation data this week. On Thursday, the core PCE price index for July matched expectations with an annual rate of increase of 1.4%, down from an annual rate of 1.5% in June and from 1.8% as recently as February. This is the inflation indicator favored by the Fed, and Fed officials would like to see inflation rise to their target level of 2.0%.
On Friday, another inflation indicator, the earnings component of the Employment report, showed that the annual rate of wage growth in August held steady from July at historically low levels. This week's tame inflation data continued the recent trend of steady or lower readings, which has been good for mortgage rates.
The primary source of improvement for mortgage rates during the week was an unusually provocative action by North Korea on Tuesday. North Korea tested a missile and flew it over Japan. The reaction from investors to the increase in tensions was to buy relatively safer assets such as U.S. mortgage-backed securities, causing mortgage rates to decline a little.
On Friday, the key monthly Employment report revealed that job gains in August were a little lower than expected. However, the shortfall was small enough that there was little change in mortgage rates due to the data. Later Friday morning, the data did cause a reaction. The ISM national manufacturing index jumped to 58.8, which was much higher than expected. Stronger economic growth causes investors to raise their outlook for future inflation, so this report was a bit negative for mortgage rates.
Looking ahead, investors will be focused on Thursday's European Central Bank (ECB) meeting. They will be looking for information about future plans for tapering the ECB's bond buying program. In the U.S., it will be a light week for economic data. Of note, Factory Orders will be released on Tuesday, and the ISM national services index will come out on Wednesday. MBS markets will be closed on Monday in observance of Labor Day.