Tariffs and Inflation Data

Although the final results left mortgage rates nearly unchanged, it was a volatile week filled with significant news. An easing of trade tensions with China caused bond yields to rise early in the week. The latest inflation data was lower than expected, however, which was good for mortgage markets, and it offset the tariff news almost completely. 

Last month, the U.S. imposed massive new tariffs on imports from China, prompting similar retaliatory measures by the Chinese. On Monday, government officials announced that the U.S. and China agreed to temporarily pause for ninety days most tariffs on each other. This news caused investors to increase their expectations for global economic growth, which was positive for the stock market. Since it also raised the outlook for future inflation, however, it was negative for mortgage rates. 

Although this annual rate has dropped sharply from a peak of 6.6% in September 2022, and from 3.9% in January of last year, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Shelter (housing) costs continue to be a primary reason why progress on bringing down inflation remains challenging. Used vehicle prices saw their second straight monthly decline, while new vehicle prices were flat.

Another significant inflation indicator released this week, which measures costs for producers, also came in below the expected levels. The April core Producer Price Index (PPI) fell 0.4% from March, far below the consensus forecast for an increase of 0.3%. It was 3.1% higher than a year ago, down from an annual rate of 3.3% last month. Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI. Going forward, investors will be watching closely to see if higher tariffs exert upward pressure on inflation levels.

With many consumers rushing to beat possible price hikes due to new tariffs, retail sales in March surged a giant 1.7% from February, the largest monthly increase since January 2023. It was back to more normal levels in April, however, with an increase of just 0.1% from March, matching expectations. Significant strength was seen in home improvement stores and electronics retailers, while sporting goods/hobbies and department stores posted notable declines.

Investors will continue to look for additional information about tariff policies. It will be a very light week for economic reports, highlighted by the housing sector data. Existing Home Sales will be released on Thursday and New Home Sales on Friday. The Global Services PMI also will come out on Thursday.