A tad warmer-than-expected September inflation report will keep mortgage rates at the levels they’ve risen to since last Friday’s blowout jobs report. With the Fed laser-focused on the job market, today’s report allows the Fed to cut rates by another 25 bps at their November 7 meeting, barring another surprising jobs report on November 1.
Core CPI, which excludes the volatile food and energy categories, rose 0.3% in September month over month and 3.3% from a year ago, a touch higher than expectations of 0.2% MoM (3.2% YoY). Looking under the hood, the main category keeping inflation slightly above the Fed’s target—shelter inflation—fell to 0.2% MoM, potentially signaling the start of a long-awaited drop. That’s because CPI shelter lags behind market-based measures of rent by a long, but unknown period of time. Both of the main subcategories of shelter inflation—rent of primary residence and owner’s equivalent rent—fell considerably to 0.3% MoM. Some of the overall beat in today’s report came from a considerable uptick in medical care services inflation, which rose from -0.1% MoM to 0.7% MoM. However, that category can be volatile due to statistical quirks in how the data is updated and does not carry through to core PCE, the Fed’s preferred inflation gauge, which will be released later this month. September PPI data will be released tomorrow and, together with today’s CPI data, will allow for a fairly accurate forecast of core PCE.
Today’s inflation data keeps the Fed on a path towards a 25 bps rate cut at their November 7 meeting, but much depends on the November 1 jobs report. Mortgage rates have risen by about 50 bps since Friday’s jobs report, though they remain well below rates at this time last year and the peak this spring. Fed funds futures markets have cut back meaningfully on their expectations of the pace of Fed rate cuts. The market was previously expecting about 25 bps more in cuts in 2024 and 50 bps more in cuts in 2025 than the Fed’s latest projection indicated, but markets are now in line with the Fed’s projections. Ultimately, economic data trumps both market expectations and Fed projections in determining the path of mortgage rates. The key remaining piece of data before the next Fed meeting is the November 1 jobs report, which will help to clarify whether the job market is as strong as last Friday’s report would suggest, or if it is indeed weakening, as suggested by the previous two months of jobs reports and today’s unexpectedly high UI claims data.
