The Bureau of Economic Analysis released its Personal Consumption Expenditures (PCE) last week and it was a market-moving number. It showed that inflation rose 0.2% in June, which was in line with estimates. Year-over-year, PCE decreased from 3.8% to 3%, which was also in line with expectations. Last year this index peaked at around 7% so this was a very large improvement. Core PCE, which removes volatile food and energy prices, rose 0.2% for the month. Year-over-year it decreased by 0.5% from 4.6% to 4.1%, which was also below expectations. Don’t forget this is also the Fed’s favorite gauge of inflation and with their upcoming Fed meeting on September 20th, this may help them see that raising their Federal Funds rate again might not be needed. To help curb or slow inflation the Fed has been raising its rate and just raised it again by 25 basis points last week. If they see inflation slowing which it clearly is, they might pause future raises and show the markets that their goals are on track to be hit.
As inflation dissipates the Bond market draws more attraction from investors. As demand for Bonds increases, Bond pricing increases. When Bond pricing increases, longer-term interest rates decrease. When the PCE was reported, Bonds jumped up over 30 basis points. Again, as inflation continues to cool, we should be seeing a more favorable bond market which will lead to lower mortgage rates going forward.