Market Recap: Hints of Inflation Drive Rates Higher; This Week’s Inflation Report Could Change Things

Blog posted On September 11, 2023

The brief relief from two weeks ago (when rates were trending lower) proved to be short lived. Last week reversed the trend for seemingly no reason. When taking a closer look, some underlying causes come to light. One was the corporate bond market. The other was the ISM Non-Manufacturing PMI (purchasing managers index). If this sounds like a different language, we’ll explain.

Why mortgage rates moved higher last week
Normally it’s easy to point out economic reports that could have affected rates. But last week’s cause wasn’t as obvious as an inflation report (like the consumer price index (CPI) or personal consumption expenditures (PCE) index) or jobs report (like the reports from two weeks ago). Instead, experts are blaming the corporate bond market and ISM Non-Manufacturing PMI (purchasing managers index).

Here's a brief explanation on what that means and why it matters:

“You may have never heard of the ISM Non-Manufacturing Index, but it's the most closely watched version of a class of economic indices (PMIs or "purchasing managers indices) that are highly regarded by financial markets,” notes Matthew Graham of Mortgage News Daily. “All that to say, if the ISM Non-Manufacturing PMI comes in much higher or lower than expected, the market tends to react.” And react they did, thanks to a higher PMI number. Though the outright number on the index doesn’t matter that much, the trend does. Apparently last week’s trend made the bond markets (consequently rates) assume that inflation is moving higher, and as we know, higher inflation is a bad guy for those who like lower rates. As for corporate bonds…there’s not much to say other than what happened there pushed rates slightly higher.

Moving on, there are bigger fish to fry with this week’s release of some inflation data from August. The CPI (most widely used gauge of inflation) is slated for Wednesday, so we’ll be looking closely at how rates react to the news. If the inflation number comes in lower than expected, rates could catch a break. However, if the opposite happens, it could add fuel to the fire that’s heating rates up.

Sources: Bloomberg, Mortgage News Daily, Mortgage News Daily, Mortgage News Daily