Over the past week, mortgage rates fell to near the best levels of the year. Weaker than expected economic data was one primary reason. Uncertainty about the ability of the Trump administration to implement policy changes was also a factor.
On Friday, two important reports on inflation and retail sales missed on the downside. In April, the core Consumer Price Index (CPI) was 1.9% higher than a year ago, down from 2.0% last month and from 2.3% in January. Core CPI excludes the volatile food and energy components, providing a clearer indication of the underlying trend. For most of last year, inflation appeared to be heading higher, but it has reversed direction so far this year. Inflation expectations are a major factor in setting mortgage rates, so this data was positive for rates.
In addition, retail sales in April rose nicely from March, but it was short of the expected levels. Surprisingly weak consumer spending was largely responsible for the slow economic growth seen during the first quarter of 2017. Since slower growth reduces the outlook for future inflation, the report on retail sales also was good for mortgage rates.
After the election, stocks and mortgage rates moved higher due to expected policy changes under the Trump administration. With the recent controversy involving the President, the uncertainty about his ability to implement these changes has increased. As a result, some of the move higher has reversed. The controversy grew on Wednesday, causing stocks and mortgage rates to decline.
Looking ahead, news about President Trump likely will continue to influence financial markets. In addition, the New Home Sales report will come out on May 23, followed by Existing Home Sales on May 24. The Durable Goods report and the second estimate of first quarter gross domestic product (GDP) will be released on May 26.