As predicted last week, great inflation reporting last week wasn't enough to move rates lower. In fact, rates actually moved a bit higher because everyone has stopped looking backward and started fearing what's ahead with inflationary pressure due to tariffs. While the China temporary truce made headlines, the bond market wasn't all that impressed, and with no new progress made last week on other trade deals, the market is getting more concerned - despite an amazing PPI report (more on that below).

The average rate on a 30-year fixed rate conventional loan stayed relatively flat at 6.818%  - just slightly up from 6.781% the week before. Mortgage rates have crept over slowly over the last few weeks- it's been feeling like death by a thousand cuts.

As a continued reminder - ARMs are making a comeback as a nice substitute for fixed rate loans as clients are shaving more than 0.5% off their rate by opting for a 7/1 ARM (which is a 30 year loan where the rate stays fixed for the first 7 years). In this high rate environment where rates are expected to go down in the near term, an ARMs are very attractive. Want to learn more? Check out our blog post here.

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Inflation by the Numbers

Inflation reporting - both the Consumer Price Index (which are prices paid by urban consumers) and the Producer Price Index (which are prices paid to US producers) - was great!

Unfortunately for us, it fell largely on deaf ears because everyone is watching a tsunami come rolling in off the coast (tariffs). 

CPI slowed to a 2.3% annual increase in April. Better than the 2.4% expected! That’s the smallest year-over-year jump since early 2021. Core inflation (which strips out food and energy) also showed signs of easing. The good news is that IF tariffs aren't nearly as bad as people think - it looks like the war on inflation may be over. 

PPI DECLINED by 0.5% in April—the biggest monthly decline in over four years. Usually we expect this number to be positive. A negative number is a huge win and a sign that distributors are absorbing a large amount of the tariffs... so far. Who knows how long that can continue. We saw a sharp drop in the cost of services like portfolio management and airline fares, which aren't affected by tariffs. Wholesale inflation cooling off is often a leading indicator that consumer prices might follow suit.

“For now, distributors are not passing on all these extra costs to consumers,” Samuel Tombs, chief US economist at Pantheon Macroeconomics, wrote in a note. He added that it took three months after tariffs were imposed on washing machines in 2018 before consumers began seeing higher prices. “It will take more time to assess whether a sustained squeeze on margins is occurring.”

Powell's "Shocking" Remarks

Powell spoke last week about potential "supply shocks" in the market due to tariff woes.“We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks,” he said at a policy conference.

The “supply shocks” remarks are similar to those Powell has delivered over the past several weeks cautioning that policy changes could put the Fed in a difficult balancing act between supporting employment and controlling inflation. Powell opted not to mention Trump or tariffs in his speech last week - but we know that they are the underlying cause for his concern.

The market is hopeful that we could see a rate cut by July, but more realistically, if you were a betting person, you'd say the first rate cut would come by September. Remember this can all change in the blink of an eye if trade deals start rolling in or the labor market turns too sour.

Stay tuned for more developments!  Make sure to follow us on Instagram for immediate reactions to all  news. 

Key reporting dates this week: 

Mon, 5/19:U.S. leading economic indicators

Tues, 5/20:  Fed Presidents speaking

Wed, 5/21: Richmond Fed President Tom Barkin and Fed Governor Michelle Bowman take part in Fed Listens event

Thurs, 5/22: S&P flash U.S. services PMI, Existing Home Sales

Fri, 5/23: New home sales, Fed Presidents Speaking, Memorial Day Weekend 😎