This Past Week:
Interest rates ticked up after a hotter-than-expected inflation report—definitely not the news we were hoping for. Let’s break it down and see what’s ahead.
“You see inflation and taxation have taken over our nation.” – Inflation by Earnest Jackson
Surprise Inflation Spike in January
On Wednesday, January’s Consumer Price Index (CPI) report dropped, and let’s just say… it wasn’t pretty. Prices jumped more than expected, with headline CPI (which includes food and energy) rising 0.5% vs. 0.3% expected. That pushed the annual rate up to 3.0% from 2.9%.
The more closely watched Core CPI (which strips out food and energy) also came in hot—0.4% vs. 0.3% expected—bumping the annual rate up to 3.3% from 3.1%.
The biggest culprits? Shelter, transportation, and energy costs. Since inflation is public enemy #1 for bonds, we saw a sharp sell-off that sent mortgage rates climbing.
A few things to keep in mind:
- This report is backward-looking. The markets are always trying to price in where inflation and economic activity will be six months from now, so while this number stings, the story can change quickly.
- The Fed’s 2% inflation goal isn’t based on this CPI report. The Fed follows a different measure of inflation (Core PCE), which we’ll see at the end of February. Right now, that number sits at 2.8% annually—much closer to the target.
Fed Chair on Capitol Hill
Fed Chair Powell gave his semi-annual testimony this week, and the message was clear: The Fed is in no rush to cut rates. Powell pointed out that the economy is strong, the labor market is tight, and inflation—while still elevated—is trending in the right direction.
After the CPI report and Powell’s comments, markets have pushed expectations for the first rate cut back to late September (previously expected in June).
China’s Economy Is Struggling
China’s housing market is in freefall. Unlike the U.S., they have too much supply, low mortgage rates, and not enough demand—leading to major deflation and economic stress.
One side effect? Lower oil prices. China is the second-largest oil consumer (right behind the U.S.), and as their economy slows, global oil demand takes a hit. We’ve seen oil prices drop from $80 to $70 per barrel in recent weeks, partly due to China’s slowdown.
Why does this matter? Lower oil prices typically mean lower inflation pressures and, eventually, lower rates.
Where Are Rates Now?
- 30-Year Fixed Mortgage: 6.87% (down slightly from 6.89% last week)
- 10-Year Treasury Yield: 4.50% (back above a key technical level, which isn’t great for rate improvements)
Bottom Line:
This week’s inflation surprise spooked bonds, sending rates higher. To see meaningful improvement, we need the 10-year yield to drop back below 4.50%.
Looking Ahead:
Next week is relatively quiet on the data front, but Wednesday’s Fed Meeting Minutes could shake things up a bit. Also, keep an eye on tariff talks and comments from Fed officials.
Let’s stay on top of it and adjust strategies as needed.
Mortgage Market Guide Candlestick Chart
Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.
If you look at the right side of the chart, you can see how prices have drifted slightly lower in recent days causing the modest spike in mortgage rates.
Chart: Fannie Mae 30-Year 6.0% Coupon (Friday, February 14, 2025)
Economic Calendar for the Week of February 17 – 21
