Overview: Over the past week, an escalation in trade tensions and weaker than expected economic data were positive for mortgage rates, and rates ended a little lower as a result.
Headlines about the status of lengthy trade negotiations between the U.S. and China influenced mortgage rates again this week. In the latest moves, the U.S. increased tariffs on Chinese goods last Friday, and China responded in kind on Monday by imposing additional tariffs on U.S. products. Since trade restrictions slow global economic activity, these actions by the U.S. and China were positive for mortgage rates. By contrast, the effect on equities was extremely negative, and the stock market dropped sharply.
Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a closely watched indicator of growth. In recent months, there have been unusually wide swings in the results, and this trend continued in the latest report released on Wednesday. In April, retail sales unexpectedly fell 0.2% from March. This followed an enormous increase of 1.6% in March and a small decline in February. The source of the monthly volatility is not clear, but investors have responded by looking at longer-term averages to determine the underlying trend. From this perspective, consumer spending this year has been consistent with solid annual economic growth of 2% to 3%.
The shortfall in this month’s Retail Sales report caused investors to reduce their outlook for future inflation, which was good for mortgage rates, and the recent news on current inflation levels was also favorable. The Consumer Price Index (CPI) is a widely followed monthly report that looks at the price change for goods and services, and it increased less than expected in April. Core CPI, which excludes the volatile food and energy components, was just 2.1% higher than a year ago and has held steady for over a year.
Looking ahead, the New Residential Construction report (also known as Housing Starts) will come out on Thursday. The Existing Home Sales report will be released on May 21, followed by New Home Sales on May 23. The minutes from the May 1 Federal Reserve meeting will come out on May 22. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. In addition, news about the ongoing trade negotiations between the U.S. and China could affect mortgage rates.