Financial News for the Week of June 16th, 2023

There were few surprises on the economic front this week in financial news. As widely expected, the Federal Reserve held the policy rate steady, after 10 consecutive increases over the past 15 months. Little changed in the statement, though the revised Summary of Economic Projections (SEP) underscored a more hawkish trajectory for the fed funds rate. And rightfully so. Retail sales and inflation data out this week continued to reflect a degree of inertia still present in the U.S. economy, which will likely necessitate a bit more ‘work’ from the FOMC through the remainder of this year.

Focusing on the major changes in the SEP, the FOMC revised its economic outlook higher for 2023. Real GDP growth is now expected to be 1.0% by year-end (previously 0.4%), and the unemployment rate was lowered to 4.1% (previously 4.5%). The inflation outlook was also revised higher, with the median forecast on core PCE now at 3.9% (previously 3.6%). With a stronger economic outlook and higher expected inflation, the median projection on the future path of the policy rate was raised by 50-bps to 5.6% – suggesting a terminal policy rate of 5.75%.

At the subsequent press conference, Fed Chair Powell was pressed on the timing of the potential future rate hikes. While remaining non-committal, Powell emphasized that the July meeting remained ‘live’, and the decision would ultimately be determined by the ‘totality’ of the data flow. From that perspective, a July hike seems more likely than not.

Data out this week on retail sales showed that consumer spending is still humming at a decent clip. Total retail sales rose 0.3% m/m in May, well ahead of the consensus forecast calling for a pullback of 0.2%. After stripping out food and gasoline, sales were even stronger – rising 0.4% m/m. While gains were led by building materials – an inherently volatile category – there was enough breadth across other discretionary categories to suggest that the ‘resilient’ narrative remains intact (Chart 1) in financial news. Our current tracking for Q2 spending sits between 1.5%-2%. While this represents a deceleration from Q1’s 3.8%, spending is still running far too hot to meaningfully cool inflation. This was evident in the May inflation data.

CPI rose by just 0.1% m/m, though the more subdued headline reading was the result of falling energy prices and slower food inflation. Core inflation (excludes food & energy), rose by a more notable 0.4% m/m with the 12-month change ticking down just 0.2%-pts to 5.3%. Sizeable contributions from both used vehicle prices and shelter were responsible for much of last month’s core gains. Excluding these two items shows a more subdued pace of price growth, with prices up just 0.1% m/m or 4.2% y/y (Chart 2). While stripping out individual categories is sometimes a dangerous game to play, there’s good reason to believe that both have downside over the coming months. This reinforces the notion that getting inflation down from today’s +5% reading to 3% over the next year is very feasible. It’s the last leg lower (from 3% to 2%) that will be the biggest challenge for the Fed, hence the need for policymakers to ‘keep at it’ for the time being.

Thomas Feltmate, Director | 416-944-5730