Rates have returned to last week’s levels, when applications for purchase loans leapt by 9 percent from the week before, and refi applications surged by 28 percent.

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Mortgage rates fell dramatically Wednesday on encouraging signs that inflation continues to ease, erasing the spike in rates seen after Friday’s surprisingly strong May jobs report.

The Consumer Price Index (CPI) showed prices rose 3.27 percent in May from a year ago, down from 3.36 percent in April, the Bureau of Labor Statistics reported Wednesday. It was the second consecutive monthly decrease in the closely watched measure of annual inflation.

Bond market investors who fund most mortgages piled into Treasurys and mortgage-backed securities on expectations that the Federal Reserve will start cutting rates in September.

Yields on 10-year Treasury notes, a barometer for mortgage rates, dropped 15 basis points on the news, to 4.25 percent. A basis point is one-hundredth of a percentage point. Rates offered for 30-year fixed-rate mortgages plummeted by 18 basis points Wednesday, according to a survey of lenders by Mortgage News Daily.

Futures markets tracked by the CME FedWatch tool on Wednesday put the odds of one or more Fed rate cuts by Sep. 18 at 71 percent, up from 54 percent on Tuesday.

“We continue to think that markets are greatly underestimating how soon and rapidly the Fed will cut rates this year and continue to look for [1.25 percentage points] of easing this year, with the first 25 [basis-point] cut coming in September,” said Pantheon Macroeconomics Chief Economist Ian Shepherdson in a note to clients.

Inflation eased in May: CPI

Core CPI, which excludes volatile food and energy prices, was up 3.41 percent in May from a year ago, an improvement from 3.61 percent annual growth in April.

Ian Shepherdson

“Looking ahead, the outlook for core CPI inflation looks benign,” Shepherdson said. “Wage growth is following the quits rate back to pre-COVID levels, pointing to a further slowdown in underlying services CPI inflation and rent inflation for new tenants. At the same time, slowing growth in consumer demand will squeeze profit margins, which still are far above pre-COVID levels.

“Meanwhile, supply chains are back to normal, global food and energy prices remain unthreatening, and capacity utilization in the manufacturing sector is below its 40-year average and still edging down.”

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is even closer to reaching the Fed’s 2 percent inflation target than CPI, registering 2.65 percent in April.

The May update of the PCE index, which is derived from CPI and Producer Price Index (PPI) numbers set to be released Thursday, won’t be out until June 28.

Homebuyers jumping at lower rates

Since hitting a 2024 high of 7.27 percent on April 25, rates on 30-year fixed-rate mortgages have mostly been on the decline, according to rate lock data tracked by Optimal Blue.

But after falling well below 7 percent, to 6.88 percent on Thursday, June 6, mortgage rates spiked on Friday and Monday after the the U.S. Bureau of Labor Statistics reported that employers added 272,000 jobs in May, compared to an average of 232,000 jobs over the past year.

Treasury yields erase last week’s spike

Yields on 10-year Treasurys spiked on June 7 after the release of a blowout May jobs report. Source: Yahoo Finance.

The spike in rates following the blowout jobs report is now looking like a temporary blip, with 10-year Treasury yields having dipped back below June 6 levels, and mortgage rates following suit.

Before rates spiked on Friday, homebuyers were jumping at the chance to take advantage of recent rate declines, according to a weekly survey of lenders by the Mortgage Bankers Association.

During the week ending June 7, applications for purchase loans were up a seasonally adjusted 9 percent from the week before. While purchase loan applications were down 12 percent from a year ago, applications to refinance were up 28 percent.

Mike Fratantoni

“Mortgage rates were trending lower over the course of last week until a stronger than anticipated employment report resulted in a bounce back, with the weekly average for the 30-year fixed mortgage rate decreasing to 7.02 percent,” MBA Chief Economist Mike Fratantoni said in a statement. “Lower rates earlier in the week meant a strong increase in refinance activity, particularly for VA borrowers, who jumped on the chance to lower their rates.”

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Email Matt Carter

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