The closely watched Retail Sales report released this week showed that consumer spending dropped even more than anticipated in April. Fed Chair Powell repeated the message that the Fed will use all its tools to support the economy. Daily volatility in mortgage markets remained low, and the change in rates for the week again was small.
With much of the economy shut down due to the coronavirus, economists predicted an unprecedented drop in consumer spending, yet the magnitude of the decline surpassed all but the most extreme forecasts. In April, Retail Sales tumbled a record 16.4% from March. The hardest hit segment was clothing and accessories with a decline of 79% from March, while bars and restaurants fell a more modest 30%.
The decline in economic activity due to the pandemic also has caused current inflation levels to fall sharply. 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, posted its largest monthly decline ever. In addition, it was just 1.4% higher than a year ago, down from an annual rate of increase of 2.1% last month.
On Wednesday, Fed Chair Powell said that the Fed will continue to do all that it can to support the economy for as long as needed. He emphasized the need for swift action and warned that over time short-term liquidity issues can develop into more serious long-term solvency problems. When asked about the possibility of a negative fed funds rate, he responded that “this is not something that we’re looking at.”
Looking ahead, the coronavirus will remain the main focus. Investors will continue to watch for news about medical advances, Fed actions, government stimulus programs, and plans for reopening the economy. Beyond that, Housing Starts will be released on Tuesday and Existing Home Sales on Thursday. Mortgage markets will close early on Friday in observance of Memorial Day.
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