Oil prices can move mortgage rates in the short run by stirring up inflation fears. But the longer-term rate story still comes back to inflation — especially services inflation, the sticky part the Federal Reserve is watching closely.
For mortgage rates to move materially lower, the bond market needs confidence that inflation is falling in a sustainable way. The latest ISM data gives us some relief, but not enough confidence yet. That is why the next few inflation readings matter so much.
The ISM Services Prices Index fell to 67.7 in June from 71.3 in May. That is good news month-over-month. The problem is that 67.7 is still a high reading. This is the area the Fed worries about because services inflation tends to be stickier than goods inflation.
Verdict: Cooling, but still sticky This helps the lower-rate argument, but it does not give the Fed enough comfort by itself.
The ISM Manufacturing Prices Index dropped from 82.1 to 73.0. That is the best news in this report. But a 73 reading still says raw material prices are rising. Inflation pressure slowed, but it did not disappear.
Verdict: Better, but not fixed Encouraging for bonds, but still too high to call a full inflation victory.
The ISM Services PMI came in at 54.0. Anything above 50 indicates expansion. That matters because services are a large part of the U.S. economy, and if the services economy is still expanding while services prices remain elevated, the Fed has less reason to rush into cuts.
Verdict for rates: Not weak enough If services are still expanding and prices are still high, the bond market has less reason to aggressively price lower mortgage rates.
This is the cleanest chart for the show. Manufacturing prices have cooled from the spike, but both manufacturing and services prices are still elevated compared with the mid-2024 zone.
Both price indexes cooled in June. Services prices fell below 70, and manufacturing prices had a sharp drop from May.
Both price indexes are still elevated. Services prices are still well above 60, and services activity is still expanding at 54.0.
Base case: mortgage rates can still drift lower if oil stabilizes and services prices continue moving down toward the low 60s. But as long as services prices stay near the upper 60s and the Services PMI remains comfortably above 50, the bond market will stay cautious.
Bullish rate scenario: Services Prices fall below 65, oil stays calm, CPI/PCE confirm cooling inflation, and the 10-year Treasury moves lower. That would support better MBS pricing and lower mortgage rates.
Bearish rate scenario: Services Prices move back above 70, oil spikes again, or CPI/PCE reaccelerate. That would raise the risk of the Fed staying restrictive longer or the market pricing in higher-for-longer rates.
Today’s honest forecast: I would not call this a “rates are about to crash” report. I would call it a “rates can improve, but the services inflation problem has to keep cooling” report.
“Here’s the part of the inflation story that matters for mortgage rates. Manufacturing prices cooled. That’s good. The ISM Manufacturing Prices Index dropped from 82.1 to 73.0. But don’t confuse better with fixed.”
“The bigger problem is services. Services prices dropped from 71.3 to 67.7, but that is still elevated. And the Services PMI is still at 54, which means the services economy is still expanding.”
“That is why the bond market is not ready to celebrate. If services inflation stays sticky, the Fed stays cautious. If the Fed stays cautious, the 10-year Treasury and MBS market stay under pressure. And if MBS stay under pressure, mortgage rates stay stubborn.”
| Month | ISM Services PMI | ISM Services Prices | ISM Manufacturing Prices |
|---|---|---|---|
| Jul 2024 | 51.4 | 57.0 | 52.9 |
| Aug 2024 | 51.5 | 57.3 | 54.0 |
| Sep 2024 | 54.9 | 59.4 | 48.3 |
| Oct 2024 | 56.0 | 58.1 | 54.8 |
| Nov 2024 | 52.1 | 58.2 | 50.3 |
| Dec 2024 | 54.1 | 64.4 | 52.5 |
| Jan 2025 | 52.8 | 60.4 | 54.9 |
| Feb 2025 | 53.5 | 62.6 | 62.4 |
| Mar 2025 | 50.8 | 60.9 | 69.4 |
| Apr 2025 | 51.6 | 65.1 | 69.8 |
| May 2025 | 50.2 | 68.7 | 69.4 |
| Jun 2025 | 50.8 | 67.5 | 69.7 |
| Jul 2025 | 50.5 | 69.9 | 64.8 |
| Aug 2025 | 51.9 | 69.2 | 63.7 |
| Sep 2025 | 50.3 | 69.4 | 61.9 |
| Oct 2025 | 52.0 | 70.0 | 58.0 |
| Nov 2025 | 52.4 | 65.4 | 58.5 |
| Dec 2025 | 53.8 | 65.1 | 58.5 |
| Jan 2026 | 53.8 | 66.6 | 59.0 |
| Feb 2026 | 56.1 | 63.0 | 70.5 |
| Mar 2026 | 54.0 | 70.7 | 78.3 |
| Apr 2026 | 53.6 | 70.7 | 84.6 |
| May 2026 | 54.5 | 71.3 | 82.1 |
| Jun 2026 | 54.0 | 67.7 | 73.0 |
