The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve. 

When gas prices reached $4.01 around Cincinnati Friday, it re-ignited inflation concerns and inflation, you’ll remember, is the enemy of mortgage rates.

As expected, mortgage rates spiked into Friday’s market close.

Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments. There are many reasons to park money elsewhere, after all.

1. The U.S. dollar is trolling near all-time lows against the Euro
2. Oil markets are returning incredibly high rates of return
3. Big banks are still writing off large mortgage losses

All three of these reasons reduce demand for mortgage bonds and — because mortgage rates move in the opposite direction of mortgage bond prices — mortgage rates rise.

This week, a few inflation-related data points will cross the wires including the Fed’s preferred inflation gauge — PCE.

PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people. It’s the Fed’s preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.

PCE is different from the Consumer Price Index because CPI is a “fixed” basket of products.

If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher. If PCE is flat or lower, mortgage rates should fall.

(Image courtesy: Gasbuddy.com)