MarketTrends 05/16/2025: Good News, Kind Of

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Price increases of unknown size and duration are coming, with deals yet to be negotiated with many dozens of nations. At least these higher costs won't be piling on at a time when inflation is already highly elevated; in fact, the latest Consumer Price Index report was actually fairly benign. While overall CPI did rise by 0.2% in April, it was an amount less than forecasters expected, and the annual rate of CPI inflation eased 0.1% to land at 2.3%, the lowest this figure has been in more than four years. Core CPI inflation (a measure exclusive of food and energy costs) also rose 0.2% for the month, leaving core CPI steady at a 2.8% annual pace. Too soon to see much effect of April's imposition of new levies, goods prices increased by 0.1% and services by 0.3%. Stickier service costs have been very slow to retreat, but at 3.6% annualized are now at their lowest level since November 2021.

Continuing the near-term favorable news on inflation, the Producer Price Index actually retreated by 0.5% in April. This was entirely due to a decline in service costs, which fell by 0.7%. Overall goods prices were flat, but so-called core goods costs moved up by 0.4%. While the 2.5% annual pace for this segment was still pretty mild, it is already the highest since May 2023 and likely to continue to move up in the months to come. How much, of course, remains to be seen, and it's by no means clear how much of any input cost increases will make their way downstream into the broader economy.

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Like the CPI and PPI measures, it's a bit too soon to see the effects of tariffs on import and export costs, and these were both pretty favorable through April as well. Import prices did rise last month, but by the barest amount, just 0.1%; this modest gain was all that import prices have increased over the last year, too, the lowest annual increase since February 2024. While export costs followed suit with a 0.1% increase of their own, the annual rate here was a flat 2%. down from a 2.6% annual clip in March. and returning to December 2024 levels after a three-month bump.

We won't get a look at new or existing home sales for April until next week, but expectations for any kind of robust sales number seem pretty low. High mortgage rates and input cost uncertainties further damped the moods of the nation's home builders in May, and the National Association of Home Builders Housing Market Index declined another 6 points to land at 39 this month, trending even further below the par level of 50. A submeasure covering single-family sales moved down even more with an eight point fall to 37, matching a December 2022 level, and expectations for sales conditions over the next six months edged lower by a point to 42. Even with only this modest decline, this measure retreated to a place last seen in November 2022, as did the measure of buyer traffic at sales offices and model homes, which posted a two-point drop to just 23 for May.

The downturn in builder demeanor for May came despite a pick up residential construction activity in April. For the month, housing starts increased by 1.6% to a 1.361 million annualized pace. Starts of single-family homes were a drag, though, posting a 2.1% decline to a 927,000 annual clip, leaving the overall figure buoyed only by multi-family construction, which rose by 10.7% to a 434,000 annualized number of units underway last month. Worries about soft future demand likely was the cause of the 4.7% decline in new building permits with reductions seen in both the single-family (-5.1%) and multi-family segments (-3.7%).

Applications for new mortgage credit managed a small increase in the week ending May 9, according to the Mortgage Bankers Association. Requests for funds to purchase homes rose by 2.3%, building on the prior week's gain, while applications for loans to replace existing mortgages couldn't sustain any momentum and settled back by 0.4% for the week.

Manufacturing activity in two Fed districts was soft in May, but even then, there was at least some reason for optimism. The Federal Reserve Banks of New York and Philadelphia released their monthly reviews for May this week, and in the New York District, the top-line figure was -9.2, a 1.1 point decline from a soggy April reading. That said, a sub-measure covering new orders powered higher by 15.8 points, rising from -8.8 to +7 for the month, providing a bit of hope for future production gains. Conversely, the employment conditions index settled backward to a greater degree, sliding from April's -2.6 to May's -5.1, and the inflation-tracking "prices paid" measure moved up 8.2 points to a flat 59, it's highest mark since July 2022. Input prices for producers have been rising, and this will likely start to be reflected in next month's (May) PPI report.

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Just down the Atlantic seaboard, the story was much the same, if perhaps a touch brighter. The Philly Fed's local barometer of manufacturing rose by 22.4 points compared to April, but even this considerable rise was only good enough to lift it to -4 for the month. New orders truly did improve, posting a whopping 41.7-point improvement to rise from -34.2 in April to +7.5 for May. The employment measure followed this with a 16.3-point increase to 16.5, a seventh consecutive positive reading. Prices paid pushed higher in this district, of course, with an 8.8 point increase pushing this measure to 59.8, returning to a level last seen in May 2022.

Industrial production was unchanged in April. Manufacturing output declined by 0.4%, erasing the previous month's increase while mining production fell by 0.3% after a 1.1% increase in March. Utility production was the lone support in April, posting a 3.3% increase in output, most likely due to the onset of warmer weather in some parts of the country. With overall output flat, the percentage of industrial production floors in active use was essentially unchanged, easing by 0.1% to a 77.7% utilization ratio last month.

Despite turmoil and uncertainty, retail sales managed to increase by 0.1% in April, improving on a 1.7% splurge to avoid price increases back in March. While the top-line figure was pulled downward by a third consecutive monthly decline in spending at gasoline stations (typical "driving" season reversal pending), consumers opened their wallets and purses for a wide range of goods and services as spending only decreased on clothing and at general merchandise stores. At a 5.2% annual increase, the pace of spending is strong but likely unsustainable; that said, as retail sales are measured in dollars, freshly higher prices when they start to show may keep this figure elevated for at least a period of time.

Consumer moods continued to darken in May, and have nearly reached all-time lows set during the difficult pandemic days. The index of Consumer Sentiment from the University of Michigan faded from an already low level in April, falling another 1.4 points to stop at just 50.8, barely above the record bottom of 50 in this 60+ year monthly survey. Current conditions were assessed to be less favorable, with this measure posting a 2.2-point reduction to 57.6, while the expectations component slid by 0.8 points to an even bleaker 46.5 in the preliminary May review. Expectations for inflation continue to skyrocket; consumer forecasts for price increases over the next year leapt again, moving up from 6.5% in April to 7.3% in May, and the five-year outlook for inflation moved up to 4.6%, a figure last seen more than thirty-four years ago.

It is unlikely the Fed will feel compelled to act unless labor market conditions weaken, and labor conditions won't weaken until economic conditions do. So far, the beneficial loop remains in place, with modest hiring and limited layoffs. That was the case again in the week ending May 10, when 228,000 new first-time requests for unemployment benefits were filed. This figure was unchanged from the prior week and very much in the middle of a recent range for claims. Ongoing claims eased slightly to 1.881 million but are still running close to a three-year high.

In the current climate, the problem with good (or even less-bad) news is that it is more likely than not to foster higher interest rates. With economies here and abroad more likely to perform, risk takers tend to pull money out of bonds to chase greater returns in equities, lifting yields. Lowered tariff levels may forestall even higher inflation at least for a time, but it will be coming to some degree, and that lifts yields, or at least prevents them from having space to decline. Uncertain growth and inflation patterns don't allow for any kind of reliable expectation for Federal Reserve policy, and that contributes, too. All this without even considering the very high levels of new debt being issued to cover the U.S. fiscal needs, and that lower tariff levels also mean less new revenue to close the deficit, in turn potentially leading to no meaningful reduction in bond supply anytime soon.

These and other contributing factors are lifting mortgage rates again. Based on how influential yields behaved this week, 30-year fixed rate mortgage rates will likely be on the rise again next week, when we expect to see a 7-9 basis point increased in the average offered rate for a conforming version as reported by Freddie Mac. There's not much significant economic news due out between now and then, and in this case, no news is likely good news.

Although there is much uncertainty and the financial markets have been volatile, we're undaunted, and offer our latest Two-Month Forecast for mortgage rates covering late April through late June.

See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.

Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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