WeeklyBasis 5/27/2008: Inflation-Adjusted Rates Are Negative, Fed Sure To React

Jumbo and conforming rates open this week up about .125% on inflation concerns. Last week, the Producer Price Index showed 6.5% year-over-year inflation in the manufacturing sector due largely to energy prices. Today Consumer Confidence came in at a 16 year low due to consumer concerns about rising food and gas prices. America is alone in excluding food and energy from its “core” inflation readings, but it’s hard to understand why.

Many economists believe that decreasing home prices could offset inflation, and today’s S&P Case-Shiller report showing existing single family home prices declined 14.1% Q12007 to Q12008 certainly supports that case. But daily costs like filling cars and stomachs are a growing concern for consumers. Also, after subtracting America’s inflation rate of 3.9% from the Fed Funds Rate of 2%, our real interest rates are significantly negative.

The next big inflation readings come this Thursday with GDP deflator data which breaks down price components of GDP, and then Friday with Personal Consumption Expenditures data which is the Fed’s favorite consumer inflation measure. If these numbers surprise on the upside, we can bet mortgage rates will rise in anticipation of a change in Fed rate stance ahead of their next FOMC meeting on June 25.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.275% APR)
15 Year: 5.75% (5.89% APR)
5/1 ARM: 5.75% (6.88% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.25% (6.39%)

Jumbo ($650,000 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.025% APR)
7/1 ARM: 6.625% (6.765% APR)
5/1 ARM: 6.125% (6.275% APR)