Economic news continues to be the focus for Orion’s brokers. Even secondary numbers(like Friday’s monthly report from the University of Michigan showing a surge in consumer confidence) are attracting attention. Yet most of the focus last week was on the inflation figures, July’s data announced last week were talked about and dissected, and will probably help chart a course for mortgage rates for your clients in the immediate future.

The Consumer Price Index (8.5 percent versus June’s 9.1 percent) had some traders feeling euphoric that the worst inflation had passed and that the Federal Reserve might raise its main interest rate by just half a percentage point in September, after two consecutive three-quarter-point increases. But the bond market continues to take a pessimistic view of the economic outlook, with the spread between the two-year and 10-year yields deeply inverted at negative 41 basis points.

Experienced brokers know that an inverted yield curve doesn’t automatically mean, or lead to, a recession, but is a strong indicator. Investors in mortgages and other fixed-income securities will flock to the safest financial asset, the U.S. bond. If there are many buyers for long term treasuries in a relatively short period of time, it tends to drive those prices higher and rates lower compared to the interest rates of short-term Treasuries.

But if you think that the food bill is astronomical, you’re right. Grocery prices rose 13%in July from a year ago, marking the fastest pace of inflation since 1979,while dining-out shot up as well. Shelter costs, which make up about one-third of the CPI weighting, also continued their ascent, up 5.7% over the past 12months. For anyone on a family road trip, or commuting, gasoline eased down7.7% in July from the prior month, and used-car prices, airline fares and apparel dropped on a month-to-month basis. We’ll take what we can get!

This can change hour by hour, day by day, but traders now see a 43.5% chance the U.S. Federal Reserve will hike rate by 75 basis points in September (compared with68% before the CPI numbers), while a 50-basis point hike is shown as a 56.5%probability.

Generally speaking, the consumer price figures are a huge relief because anything that keeps the Fed from doing more damage is a positive for all of us and our clients. Before saying that the worst is over, know that one month doesn't necessarily make a trend but Orion’s management is certainly encouraged that inflation is moving in the right direction.

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