Peace talks fuel market rally

Happy Friday from Local Mortgage!

Mortgage rates improved this week and will end the week near a 4-week low, back to 6.25% for our best 30-year fixed Conventional scenario.    

This week's resilience is almost entirely due to progress toward peace in the Iran war. Thursday’s news that President Trump had cancelled planned air strikes and that both sides had approved final details of a permanent ceasefire, fueled a strong reaction with stocks rallying, oil falling, and rates dropping. If a peace deal becomes official, there's more room for improvement. 

The Consumer Price Index (CPI), one of the most closely watched inflation indicators, showed that prices rose 0.5% in May from the previous month, matching expectations. CPI was 4.2% higher than a year ago, up substantially from an annual rate of 3.8% last month to the highest level since April 2023. Of note, the annual increase in average hourly earnings in May was 3.4%, meaning that wage gains are no longer keeping pace with inflation.

A different inflation report released this week, which measures wholesale costs for producers, also reflected the rise in energy prices. The May Producer Price Index (PPI) rose a massive 1.1% from April, far above the consensus forecast for an increase of 0.7%. A record monthly surge of 2.8% in the price of goods, which are mostly products related to energy, accounted for roughly 80% of the rise in the index. PPI was 6.5% higher than a year ago, up sharply from an annual rate of 5.7% the prior month and the highest level since November 2022. Its impact was relatively minor, however, as investors tend to place a lot more weight each month on the Consumer Price Index report, which better reflects overall inflation levels in the economy.

Looking ahead, attention will remain fixed on the conflict in the Middle East. In addition, the next Fed meeting will take place on Wednesday. No change in rates is expected, and investors will be closely analyzing the commentary for clues regarding future policy adjustments. For economic data, Housing Starts and Import Prices will come out on Tuesday. Retail Sales will be released on Wednesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Mortgage markets will be closed on Friday for Juneteenth.

Hope everyone has a great weekend and thank you for reading.