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Economy, the Fed, and Rates…

May 5, 2026

Economic Data & Labor Market

• 1Q GDP softens to 2.0%; AI capex masks consumer fade. GDP printed 2.0% q/q saar (vs 2.2% expected, up from 0.5%), with business investment at a 10.4% annualized rate – strongest in nearly three years. Equipment +17.2%, IPP +12.0%, both AI-driven. Pantheon's Allen estimated AI investment accounted for “about half” of headline growth net of imports. Consumer spending decelerated to 1.6%, but final sales to private domestic purchasers accelerated to 2.5%. AI capex is doing the lifting; the consumer is wobbling.
• PCE inflation jumps to highest level since May 2023. March headline PCE rose to 3.5% YoY (0.7% m/m, largest since 2022); core held at 3.2% (0.3% m/m). 1Q quarterly readings hotter: headline 4.5% q/q saar, core 4.3%, well above 4Q25's 2.9%/2.7%. AAA gasoline averaged $4.30/gal, +44% since the war began. BofA expects headline to peak in 2Q at 4.1%; 4Q/4Q core at 3.2%. Real personal income ex-transfers slowed to 0.4% YoY – a recessionary reading without the corresponding rise in unemployment yet.
• ISM Manufacturing: Prices spike to a four-year high; hiring weakens. Headline held at 52.7 (highest since 2022); prices paid surged to 84.6, the highest since April 2022's comparable oil-shock peak. Employment dropped to 46.4 (vs 48.8 expected); new orders held at 54.1. Respondents flagged stockpiling ahead of war- and tariff-driven price hikes, with supplier deliveries lengthening on Hormuz/Suez/Red Sea rerouting. The breadth of price pressure is the highest in four years.
• Consumer cushion narrowing. Personal saving rate held at 4.0%, a historic low. Tax refunds +17% YoY (~$45B), due in part to OBBBA, but BofA estimates gasoline has eaten roughly half that windfall and pegs the full-year “gas tax” at 0.3%–0.5% of GDP. UMich sentiment final April 49.8 (record low; preliminary 47.6). April payroll forecasts cluster well below March's 178k: BE 57k, BofA 80k, Wells 70k, Deutsche 50k; unemployment seen at 4.2%–4.4%. Even the high end is a sharp step-down.

• Most divided FOMC meeting since October 1992. The Fed held at 3.50%–3.75% on an 8-4 vote. Kashkari, Hammack, and Logan dissented to remove the “easing bias”; Miran dissented for a 25 bp cut. Powell described a three-stage shift in train (easing bias → neutral → hiking bias) and said the committee's center is “moving toward a more neutral place,” conceding the dissenters' case was “perfectly good.” BI's NLP model flagged Powell's opening remarks as among the most hawkish of his tenure.
• Hawks lay out the hike trigger. Kashkari's Friday essay: a quick Hormuz reopening warrants extended pause then gradual cuts; extended closure warrants “rate increases, potentially a series of them … even at the risk of further weakness to the labor market.” Hammack and Logan made parallel cases. The trigger is unanchored long-run inflation expectations, not labor strength. BI's read: cuts aren't imminent, but if joblessness climbs (BE sees u-rate >4.5%), cuts return and the curve bull-steepens.
• Warsh faces a harder Fed than the market wants. Powell's term as chair ends May 15; Warsh confirmation is expected the week of May 11; the next FOMC sits roughly a month later. Bloomberg's Markets Pulse (n=85): 73% say dot-plot elimination would make trading the Fed harder; median 2026 year-end 10y forecast 4.37% (range 2.35%–6.0%); 52% more concerned about Fed independence than at year-start; 65% expect at least one more meeting this year with four-plus dissents. Warsh inherits a committee where over a third of dots already see rates steady this year.

Treasury Yields & Bond Markets

• Curve bear-flattens on the hawkish Fed signal. Per Bloomberg closes: 2y +10 bps to 3.88%, 10y +7 bps to 4.37%, 30y +5 bps to 4.96% – the largest one-week gains since the week ended March 20. 2s10s flattened ~3 bps to 49 bps. Front end leading, long end participating but lagging – markets pricing fewer cuts (and a pinch of hike risk), not a renewed term-premium spasm. SOFR options now imply no cuts until late 2027.
• Debt-to-GDP crosses 100% for the first time since 1946. Publicly held debt hit $31.27T against $31.22T trailing GDP – 100.2% as of March 31. CBO projects 100.6% for FY26, a new postwar record by 2030, and 120% by 2036. Drivers are structural: deficits near 6% of GDP, $1.33 spent per dollar collected, one in seven federal dollars now to interest. Schrager (Bloomberg Opinion) flagged the bond-market complacency and shrinking “convenience yield” as foreign official demand fades and Europe issues more sovereign debt.
• Forecast resets reflect the new bar for cuts. BofA pushed its 50 bp easing path to September/October “with high risk these cuts may not materialize,” and now sees 10y at 4.25% by 4Q26 and 30y at 4.75%. Deutsche sees the Fed “on hold near neutral indefinitely.” Per CME, traders see >80% probability of no cut through December. Treasury's quarterly refunding Wednesday is in focus; consensus does not expect coupon-size increases before 2027.

Dollar, Commodities & Market Dynamics

• S&P 500 logs longest weekly rally since 2024 – but the decoupling has limits. Five consecutive weekly gains; April was the best month since 2020. ~81% of S&P 500 companies have beaten 1Q estimates. Hyperscalers (Amazon, Meta, Microsoft, Alphabet) are guiding to capex 77% above last year's record $410B – visible in Caterpillar's 10% pop on a record backlog with commitments into 2028. El-Erian's caution: a Gulf capital pullback and “valuation fatigue” set a geoeconomic ceiling – minor earnings misses or AI-rollout delays could trigger sharp repricing.
• Crude eases on diplomacy hopes; Trump pledges Hormuz transit support. WTI fell 2.8% Friday to $102 on reports Tehran submitted a new proposal; Brent briefly touched $126 mid-week before retracing to ~$110 Monday. Trump on May 4 pledged U.S. support to help ships transit Hormuz – the first concrete move toward restoring traffic since the war began. Gold settled at $4,609. McGlone (BI) flagged the historical pump-then-dump pattern (2008, 2022). Bloomberg Dollar Spot Index little changed Friday; euro $1.17, yen 157.06.

Housing & Multifamily

• Starts surge, permits collapse – the forward indicator is flashing. March starts +10.8% to 1.502M annualized (highest since December 2024); multifamily 5+ unit starts +13.5% YoY at 446k. But total permits fell 10.8% to 1.372M (lowest since August), multifamily permits dropped 23.5% MoM and 5.3% YoY to 427k. NAHB builder sentiment hit a seven-month low in April. Starts reflect approved projects; permits reflect builder reaction to materials costs and elevated mortgage rates. Watch whether the bifurcation resolves toward the weaker permit signal.

CRE Finance Market Implications

• Long end stays sticky; floating-rate relief pushed out. 10y at 4.37% (6 bps off 2026 high), 30y at 4.96% (4 bps off): no near-term relief for fixed-rate permanent financing. The debt-to-GDP cross-over and shrinking convenience yield argue for continued long-end stickiness independent of the Fed. For floating-rate borrowers, BofA's reset of the cut path with explicit non-execution risk means coupon relief is later and more conditional than priced into many transitional deals struck in 1Q.
• Construction input cost shock isn't priced into many development pro-formas. ISM prices paid at 84.6 is the highest since the comparable April 2022 oil-shock peak. Panelists flagged crude-, polyethylene-, and LNG-linked materials and 15%–25% imported component cost spikes on top of war-driven shipping disruptions. Caterpillar's order book into 2028 also reflects AI/data-center demand pulling forward equipment pricing power.
• AI capex is both demand engine and capital competitor. Hyperscaler capex is set to rise 77% above last year's $410B, supporting data centers, power, equipment, and logistics demand. But capital markets remain heavily focused on AI-linked growth, which could leave non-AI transitional and development assets more dependent on receptive CRE credit markets.
• Bank/NBFI plumbing is the sleeper – and a Fed governor agrees. Goldman's NBFI loan book grew to $118B at year-end 2025 from $91B; the Group of Thirty's April report flagged that NBFI exposure exceeds loss-absorbing capital at “many U.S. and some euro area banks.” Fed Governor Michael Barr warned May 4 that stress in private credit could spark “psychological contagion” leading to a broader credit crunch. For CRE, if banks tighten lending to private credit, BDCs, or other NBFI platforms, bridge and transitional CRE lenders could feel it quickly.

You can download CREFC's one-page MarketMetrics, which includes statistics covering the economy and the CRE debt capital markets, here.

Contact Raj Aidasani (raidasani@crefc.org) with any questions.

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