Rate Update June 27, 2008

This morning’s Personal Consumption Expenditure Report (PCE) showed that core inflation increased in line with analysts’ expectations. This is good news for mortgage rates because there has been a lot of concern over growing price pressures in our economy (inflation is the primary factor that drives mortgage rates).

With the stock market indexes losing value, oil prices over $140/ barrel, and continued fears in the financial industry there is a lot of uncertainty in the markets right now. BAD NEWS TENDS TO BE GOOD FOR MORTGAGE RATES because investors view bonds as a “safe-haven” for their investment dollars. In times of uncertainty bonds tend to get bid higher in price which pushes yields lower. We think mortgage rates have a good likelihood of moving lower amid all this uncertainty.

Current Outlook: floating bias

What is Personal Consumption Expenditure (PCE)?
The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed’s favorite gauge on inflation.