Global Economic Growth Slowing
Increasing concern that the pace of global economic growth may be slowing was favorable for mortgage markets last week. The major economic reports and Fed minutes caused little reaction. As a result, mortgage rates ended the week a little lower.
Several factors have been causing investors to gradually reduce their outlook for global economic growth, particularly in Europe. These include lockdowns in China due to the pandemic and sharply higher food and energy prices. Since slower growth reduces future inflationary pressures, this was positive for mortgage rates.
Inflation Indicators Matches Fed Expectations
The PCE price index is the inflation indicator favored by the Fed. In April, core PCE was 4.9% higher than a year ago, matching expectations, and down from 5.2% last month. For comparison, the annual rate of increase was below 2.0% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as disruptions due to the pandemic and the conflict in Ukraine are resolved.
New Home Sales Drop
Reflecting the increase in mortgage rates and home prices in recent months, sales of new homes in April declined a massive 17% from March to an annualized rate of 591,000, far below the consensus forecast of 750,000. This was down from 839,000 in January 2021 and the lowest level since April 2020. The median new-home price was an eye-opening 20% higher than last year at this time at $450,600.
The minutes from the May 4 Fed meeting released last Wednesday contained no surprises.
Fed May Seek Neutral Measures to Bring Down Inflation
To help the economy recover from the pandemic, the Fed put in place extremely loose policy measures. With the recent surge in inflation, however, officials are now in the process of tightening. The big question is whether increasing the federal funds rate back to just a “neutral” level, meaning that it will neither stimulate nor restrain economic growth, will be sufficient to bring down inflation. Some officials noted in the minutes that raising rates even higher to a “restrictive” stance, which would slow the economy, maybe appropriate depending on future financial conditions.
Major Economic News Due This Week
Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. They will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national manufacturing index will come out on Wednesday and the ISM national service sector index on Friday. Mortgage markets will be closed on Monday in observance of Memorial Day.