If there is a kryptonite to the Superman of asset prices, Ben Bernanke, it is inflation and its direction over the months while the Fed continues to print more money will be the most important thing to watch. Today’s Aug CPI is expected to rise .6% m/o/m, the largest gain since June ’09 led by energy and food prices. The core rate is expected to be up a more benign .2% m/o/m. In the meantime we have crude above $100 today for the 1st time since May, gasoline prices at the pump the most since April and the US$ is getting hammered. The Fed succeeded yesterday in collapsing the spread between the 30 yr FNMA coupon and the 10 yr yield to a record low. The key though in the eventual direction of mortgage rates will still be the 10 yr and its yield today is just a few bps from the highest since May. Since late July when Draghi started the central bank intervention, the spread between the 10 yr yield and MBS has fallen by 40 bps but the 10 yr yield is higher by almost 40 bps and it’s why the avg 30 yr mortgage rate is unchanged during this time frame. Thus, the only thing that has really changed over the past few months is a move higher in stock and commodity prices and little change in what the Fed most wants to target and that being interest/mortgage rates. Interesting times indeed.
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