Overview: The manufacturing report released over the past week was stronger than expected, which was negative for mortgage rates. The inflation data came in right on target, and there was no significant market-moving news from other sources. As a result, rates ended the week a little higher.

On Tuesday, the Institute for Supply Management (ISM) Manufacturing Index jumped to 61.3 — well above the consensus forecast. This was the highest level since May 2004 and the second strongest figure ever recorded. The New Orders and Production Indices — both components of the ISM Manufacturing Index — showed large increases this month, while the New Export Orders measure declined slightly from last month. The manufacturing sector has been strong since the election of President Trump, but the greatest risk to its continued health is the possibility of an escalation in the trade war, which would increase the tariffs on exports. Since stronger economic growth raises the outlook for future inflation, this report caused mortgage rates to rise.

The most recent inflation data matched expectations and caused little reaction. In July, the core Personal Consumption Expenditures (PCE) Price Index, which excludes the volatile food and energy components, was 2.0% higher than a year ago, up from an annual rate of increase of 1.9% last month. This is the inflation indicator favored by the Federal Reserve, and after holding at lower levels for most of the last several years, it now has climbed to the Fed’s target rate of 2.0%. If inflation increases significantly from here, it could cause the Fed to tighten monetary policy at a faster pace.

Week Ahead

Looking ahead, the ISM Services Index will come out on Thursday, and the important monthly Employment Report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, the European Central Bank meeting on September 13 could influence mortgage rates.