Except Concerns, Mostly Down
April 18, 2025 -- This week ended with Good Friday, a financial market holiday, which added a touch of calm to an already more-muted week. Of course, after last week's roiling financial markets, it's likely that nearly any sort of situation would have felt calmer. However, this doesn't mean the tariff storm or its effects has necessarily subsided; rather, it feels more like waiting for whatever changes will come to spark the next panic.
While that drama plays out in both the foreground and background and starts down a path to whatever is its inevitable conclusion, the effects of actual and expected changes to levies are already being seen in the data, and long before any changes in cost reach the consumer. Certainly, we see these effects in equity prices; major stock indices were mostly down this week, reflecting concerns about the business climate yet to come, and also in bond yields, which retreated somewhat after spiking last week.
In an economic outlook speech this week at the Economic Club of Chicago, Fed Chair Powell was quite frank. "The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain." He continued: "The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth." [emphasis ours] It is somewhat unusual to hear a Fed Chair describe something in an such absolute manner; it seems to us that more often you would hear "may", "are likely to" or similar language.
This being the case, the Fed's job has become much more complicated, and hard choices may be ahead: "We [the Fed] may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close." With this as a backdrop, it's certainly not clear how the Fed will act in the coming months and quarters. Will they be tightening policy to combat inflation? Cutting rates to combat labor market weakening? Standing pat to see how everything plays out? Your guess is likely as good as theirs at this point.
Given the situation at hand, it's hard to get too excited about the improvement in both import and export prices last month. Import costs actually declined by 0.1% in March, their first retreat since last September. The decline helped trim the annual rate of import inflation back down to just 0.9%; it was as high as 2.2% annual as recently as December 2024. Costs for exports also settled back last month, so the U.S. was exporting less inflation as well. There was no change in export costs last month, and this in turn helped the annual rate of export inflation to retreat to 2.2% -- still firm, but a second consecutive 0.2% step in the right direction. Unfortunately, the hope that the improved figure from March imparted is likely to all be undone and then some in the months ahead, but for at least now, import and export inflation is down.
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Not down whatsoever were retail sales in March, but the sharp improvement likely presages slowing yet to come as consumers front-load their spending where possible to get ahead of tariff impacts. For the month, overall retail sales gained 1.4%, the largest monthly gain in more than two years. More than half of the gain was from auto sales, as percentage-based tariffs will have the largest dollar impact on the priciest goods; excluding them, retail sales rose by a still-fair 0.5%, and 0.8% when gasoline sales were also excluded (gasoline prices declined last month, and such reductions pull down the headline figure). In fact, of the major categories, only gas station sales and those of furniture and home furnishings decreased last month. The impressive March gain in retail sales now past, what's less clear is how much demand has been borrowed from the coming months, and whether consumers will continue to spend in the face of rocky financial markets and growing economic uncertainty.
A couple of regional looks at manufacturing activity in April both pointed down. Local reports from the Federal Reserve Banks of New York and Philadelphia showed declining activity in April, with the New York Fed's overall barometer posting a -8.1 for the month, a somewhat less-poor showing than March. A measure covering new orders remained soggy, sporting a value of -8.8 (a better grade of poor than in March) while employment edged up from -4.1 to -2.6. The only component on an upswing was the one you would prefer not to see moving in that direction, as the 'prices paid" inflation measure pushed up by 5.9 points to 50.8, marching higher for a fourth straight month. The current level is more than twice the one seen as recently as December (21.1).
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Just down the block, the Philadelphia Fed released its similar local review. The story here was rather more bleak, as the general business barometer saw a 38.1-point decline, slumping from +12.5 in March to -26.4 in April. New orders plummeted from a positive 8.7 to a negative 34.2 while employment stagnated with a drop from a solid 19.7 to a breakeven 0.2. Prices paid told a similar tale as the one from New York; while the 2.7 point increase was mild, it lifted the value here to 51.0, double the level of last November. In both cases, business activity was going down while prices were going up, just the kind of combination the Fed is most concerned about.
Although their collective demeanor was likely improved somewhat by (temporarily) lower mortgage rates, the increase in home builder sentiment probably isn't poised to improve much. The Housing Market Index from the National Association of Home Builders edged higher to 40 for April, up just a lone point from March. Sales of single-family homes were slightly better, posting a two-point increase to 45, but the sales outlook for the next six months darkened, falling from 47 to 43. Potential homebuyer traffic at model homes and sales offices ticked up a point to a still-very-low 25. As far as the impact from increases in tariffs goes, the NAHB reported that 60% of builders reported their suppliers have already increased or announced increases of material prices due to tariffs, with an average increase of 6.3%; the NAHB says this translates into a cost increase of $10,900 per home. Builders are already using price cuts and other sales incentives to move homes, so it seems unlikely that much of that increase can be absorbed.
As well, one might infer a more cautious outlook for home building based on the 11.4% decline in housing starts in March, which dropped from a 1.494 million (annualized) rate of construction to 1.324 last month. Single-family starts fell 14.2% to just a 940,000 annual pace; multifamily construction fared somewhat better, sporting a 3.5% decline to a 384,000 annual clip. Driven by that multi-unit housing sector, permits for future construction activity managed a 1.6% increase; single-family house permits slid by 2%, but multifamily gained 9.3% for the month. Rising costs and immigration changes will continue to challenge home builders even if demand for new homes manages to hold up in the coming months.
Industrial production was also down in March, declining by 0.3% for the month. That said, the underlying components weren't all that bad, as manufacturing output managed to increase by 0.3% and mining output by 0.6%, although both gains were smaller than those recorded for February. The drag on the top-line number was all due to a 5.8% decline in utility output, a second consecutive retreat. While such a fall might indicate slackening demand, weather plays a considerable role in utility production, and it would seem that milder weather in some parts of the country last month required less heating and cooling. Regardless, even with the monthly dip, utility production was still 4.4% above year-ago levels. That said, the monthly easing in overall output fostered a decline in the amount of industrial production floors in active use, which stepped back to 77.8% for the month, retreating from a six-month high.
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As might be expected when mortgage rates push higher, requests for mortgage credit drop off. That was the case in the week ending April 11, as the Mortgage Bankers Association reported an 8.5% decline in mortgage applications. Breaking a six-week string of string of increases, applications for funds to purchase homes declined by 4.9% for the week, while those for funds to refinances existing loans saw a 12.4% reduction. Next week, we'll get to see how sales of both new and existing homes fared in March, and there may be a modest improvement to be seen. Last month, mortgage rates and inventory levels of homes to buy were both somewhat improved as the spring housing season began.
One thing that was down -- and it is a good thing -- were initial requests for unemployment benefits. Already holding at a low level for a fair while now, initial claims for assistance eased by 9,000 in the week ending April 12, landing at just 215,000 for the week. At some point, announced federal layoffs should start to be reflected in these figures, but so far, not so much. Continuing claims for assistance remain elevated, though, remaining close to a three-year high at 1.885 million (+41,000) in the latest data week.
Of course, things aren't down across the board; for example, concerns about the near- and longer-term outlooks continue to be elevated, and uncertainty remains at a high level. Inflation remains higher than desired and seems poised to start to move higher still. Counterbalancing some of these issues is that employment levels remain high, and at least for the moment, overall wage growth is outstripping price increases, and perhaps even eroding some of the pain that higher price levels continue to provide.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Apr 11 | Mar 14 | Apr 12 | |
| 6-Mo. TCM | 4.18% | 4.27% | 5.37% |
| 1-Yr. TCM | 3.95% | 4.04% | 5.12% |
| 3-Yr. TCM | 3.83% | 3.95% | 4.67% |
| 10-Yr. TCM | 4.33% | 4.28% | 4.48% |
| Federal Cost of Funds |
3.666% | 3.673% | 3.889% |
| 30-day SOFR (daily value) | 4.34304% | 4.34867% | 5.32240% |
| Moving Treasury Average (MTA/12-MAT) |
4.497% | 4.574% | 5.114% |
| Freddie Mac 30-yr FRM |
6.62% | 6.67% | 7.10% |
| Historical ARM Index Data | |||
The badgering of the Fed and threats to replace Chair Powell by the President likely isn't helping to instill confidence, either, and making a change to Fed leadership in the midst of all this would actually risk even greater upheaval in the financial markets. The central bank seemed to be making progress toward its price stability goal without undue economic damage until tariff upheavals significantly changed the outlook. For better or worse, the best course of action by the Fed is to hold steady until there is more clarity on how the changes Mr. Powell highlighted play out.
To be sure, a quarter-point (or even half-point) cut in the federal funds rate doesn't change the picture very greatly from either a business or consumer standpoint, and lower interest rates are only useful to those who need (and have the confidence to) borrow money. As well, if cutting rates should in turn help keep inflation firm at a high level, long-term interest rates would not only not fall, they would likely remain high or even increase.
Mortgage rates seem likely to settle back a little next week. While the yield on the 10-year Treasury on aggregate is finished this week no better then where it ended last week, some of the extreme pressure of a week ago seems to have bled out of the market. Of course, things can and do change in a hurry, but for the moment, we think there's a chance for a decline of 5-7 basis points in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday at noon. While we hope for this outlook to come to pass, we'll also get to work on a new two-month forecast for mortgage rates... lucky us.
Can mortgage rates find any space to decline meaningfully as we head into the spring housing season? See what we think in our latest Two-Month Forecast for mortgage rates covering late February through late April.
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".
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