The global economy saw a small drop in consumer price growth last month. This indicates a slight easing of inflation pressures. According to Sigmanomics Analytics, the global consumer price index (CPI) decreased. In April, it reached an annualized rate of 3.7%. This is a decrease from 3.8% in March. This marginal deceleration reflects relatively stable inflation conditions across major regions, driven by a combination of softer commodity prices and stronger currencies. Shipping costs also remained below their year-ago levels, although strategic stockpiling may have temporarily elevated goods prices.
Our May baseline forecast predicts a slow decline in global inflation until 2025. This trend is mainly due to lower expectations for economic growth. Reduced energy demand and slower industrial activity are expected to keep upward price pressures in check.
Regional Disparities: China Faces Deflation, U.S. Braces for Tariff Impact
Deflation persists in China, underscoring its ongoing economic fragility. In contrast, inflationary risks remain elevated in the U.S. due to the implementation of new tariffs. However, U.S. economic growth is anticipated to decelerate. Moody’s forecasts that inflation will begin to decline once more by 2026. The baseline forecast for May assumes that major global currencies will keep some of their recent strength against the U.S. dollar. This currency strength, along with lower oil prices and reduced global output expectations, should continue to limit inflation.
Monetary Policy Outlook: Central Banks Hold Steady
Monetary policy projections remain unchanged for the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England (BoE). Moody’s has changed its outlook for the Bank of Japan (BoJ). It now expects the next rate hike to occur in Q1 2026 instead of Q3 2025. This delay reflects the continued subdued inflation environment in Japan and the lack of strong economic momentum.
U.S. Mortgage Market: Stability with Lingering Challenges
Modest Activity Rebound Amid High Rates
U.S. mortgage activity showed slight improvement last week. The Mortgage Bankers Association’s composite index increased by 1.1% compared to the previous week. This rise follows a period of volatility and signals tentative momentum returning to the housing market. Purchase applications increased 2.3%, suggesting that some buyers are cautiously testing the waters despite headwinds. On the other hand, refinancing activity slipped by 0.4%, as persistently high rates continue to deter homeowners from refinancing.
The average rate for a 30-year fixed mortgage rose slightly to 6.86%, up two basis points. This rate shows stability compared to the turbulence in April, which was mainly due to tariff announcements. However, it is still much higher than pre-pandemic levels, creating affordability challenges for many buyers.
Bond Market Dynamics: Treasury Yields Find Equilibrium
Treasury yields have stabilized following the release of inflation data that largely met market expectations. The 10-year yield serves as a crucial benchmark for mortgage rates. Recently, it has exhibited minimal fluctuations. This follows the substantial changes observed in April. Investors are now waiting for clearer signals on the Federal Reserve’s next policy decisions.
Moody’s continues to assign a 60% probability to a U.S. recession in 2025. However, ongoing trade tensions could disrupt the usual pattern of falling yields during downturns. Economic slowdowns usually lead investors to seek safety in government bonds. This action lowers yields, which in turn reduces mortgage rates. If foreign investors begin to reduce their holdings of U.S. Treasuries in response to protectionist trade measures, this dynamic may not play out as expected.
Affordability Remains a Pressing Concern
Housing affordability remains near four-decade lows, with elevated borrowing costs compounded by broader economic uncertainties. A weakening labor market is adding to the strain, with unemployment forecasted to approach 5% by mid-2026. These pressures are dampening buyer confidence and reducing the pool of qualified borrowers. Additionally, concerns over job stability are prompting many potential buyers to delay major financial commitments.
Another factor constraining the housing market is the lock-in effect—homeowners with low fixed mortgage rates are reluctant to sell, further limiting housing supply. Despite the small uptick in purchase applications, affordability barriers continue to sideline a significant portion of would-be buyers.
Policy Crossroads: Fed Faces Dual Pressures
The path forward for mortgage rates is increasingly complex, as the Federal Reserve navigates the conflicting demands of inflation control and economic support. On one hand, tariffs and supply-side constraints may necessitate higher interest rates to keep inflation contained. On the other, slowing growth and financial stress call for easing.
Even if rates decline later in 2025, the drop is unlikely to bring the average 30-year mortgage below 6.5% in the short term. Moreover, if rate cuts are driven by rising unemployment and economic weakness, any improvement in affordability could be offset by labor market anxiety, limiting the potential rebound in home sales.
Market Wrap: Mixed Global Sentiment Amid Yield and Commodity Shifts
U.S. Equities Inch Higher, Europe and Asia Diverge
Global equity markets delivered mixed performances on Wednesday, reflecting a cautious investor mood. In the U.S., major indices built on early-week gains. The tech-heavy NASDAQ led with a 0.72% rise, while the S&P 500 edged up 0.1%. The Dow Jones Industrial Average, however, dipped 0.21%.
In Europe, market sentiment was weaker. France’s CAC 40 and Germany’s DAX both fell by 0.47%, while the U.K.’s FTSE 100 slipped 0.21%. Asian markets displayed a mixed performance. Japan’s Nikkei fell by 0.14%. In contrast, Hong Kong’s Hang Seng rose by 2.3%, driven by gains in technology and property stocks.
Treasury Yields Climb
U.S. Treasury yields rose modestly across the curve. The 10-year yield increased by 7 basis points to 4.547%, and the 2-year yield gained 5 basis points to reach 4.068%. These moves reflect investors’ digesting of recent inflation data and adjusting expectations for Fed policy action.
Energy Prices Retreat
Oil and gasoline prices posted modest declines. West Texas Intermediate (WTI) crude oil decreased by 1.4%, reaching $62.78 per barrel. This decline occurred as markets considered global demand concerns alongside potential supply risks. Gasoline futures decreased by 0.45%, reaching $2.16 per gallon. This offers some relief for consumers as the summer driving season nears.
The global economy is navigating a transitional phase characterized by softening inflation, uneven growth, and significant policy uncertainty. While global price pressures have lessened to some extent, regional issues persist. For instance, deflation in China and tariffs in the United States complicate the situation. As a result, attaining stable inflation will prove to be a challenging task.
In the U.S., the housing market is caught between high interest rates and a weakening labor market. This situation creates affordability challenges and limits both refinancing and homebuying activity. The broader financial markets are caught between optimism over disinflation and caution over unresolved geopolitical and economic risks.
With central banks carefully balancing competing priorities, the remainder of 2025 is likely to bring more nuanced shifts in monetary policy rather than decisive actions. Investors, borrowers, and policymakers alike will need to tread carefully as they respond to this evolving landscape.
Written by Sigmanomics Team
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