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    market analysis week of 5-17-2020

    Investors were mostly focused on inflation last week, and the data was much stronger than anticipated. The Retail Sales report was roughly in line with expectations overall and caused little reaction. As a result, mortgage rates ended higher.

    Inflation is Worrisome for Investors

    Since inflation reduces the value of future cash flows, higher levels are negative for mortgage-backed securities (MBS) and thus for mortgage rates. The pandemic caused a significant decline in inflation, which was a major factor behind the record low mortgage rates seen last year. With the reopening of the economy, however, investors have been worried about rising inflation, and the latest report certainly justified these concerns.

    The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In April, core CPI, which excludes the volatile food and energy components, jumped 0.8% from March, well above the consensus forecast for an increase of just 0.2%. Core CPI was 3.0% higher than a year ago, up from an annual rate
    of increase of 1.6% last month. The big question is to what degree the pickup in inflation is due to temporary factors or to longer-term influences.

    April Retail Sales Fall Short of Forecast

    Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth, and the results this month were mixed. In April, retail sales were flat from March, which was below the consensus forecast for a gain of 1.0%. However, the amazing March results were revised even higher from an increase of 9.8% to 10.7%, roughly offsetting the shortfall in the April figures.

    Major Economic News Due This Week

    Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, it will be a very light week for economic data, with a focus on the housing sector. Housing Starts will be released tomorrow and Existing Home Sales on Friday.

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