Financial News for the Week of June 21st, 2024

Data out this week was largely tilted to the housing market, providing an update on where things stand in the usually busy spring season. Thus far, the situation appears largely unimpressive as market activity continues to be impacted by the dowsing effect of higher interest rates and prices. Another look at the health of the U.S. consumer via the retail spending report was also in the lineup. Despite news on the economic front, activity is the stock market was largely driven by the ups and downs of Nvidia, which managed to dethrone Microsoft this week as the most valuable public company in the world. Bond prices also continued to rise, driving yields lower. At the time of writing, the 10-year Treasury yield was down 0.5 basis points relative to where they started the week.

Consumer spending continued to show signs of fading as retail sales barely grew in May (0.1% m/m), following a decline of -0.2% in April. The outturn was weaker than analysts expected (Chart 1). Overall, weak retail sales are consistent with a U.S. economy that is losing momentum. The main takeaway is that consumers may finally be starting to yield to the pressures of elevated prices and higher borrowing costs.

Nonetheless, most Fed speakers throughout the week were key to emphasize that there is still more ground to be gained on the inflation front with the current restrictive policy before normalization becomes appropriate. In a recent interview, Fed Governor Barkin suggested that consumer spending is “fine” despite the weak retail sales print. In his view, “consumer spending is solid, not frothy and not weak” and the Fed is well positioned to respond to any path the economy may take. Other speakers, including New York Fed President John Williams and Boston Fed President Susan Collins, stressed the Fed’s data dependent approach in financial news. Williams noted that he expects “interest rates to come down gradually over the next couple of years” but declined to give specific timing, while Collins stressed the need for patience and time to assess the “constellation of available data.”

On the housing front, homebuilding activity retreated last month with a decline in both housing starts and building permits. A consistent pullback in permitting activity over the past few months, has resulted in a decline in the number of units under construction. Evidently, elevated interest rates are weighing not only on buyers, who have pulled back on new home purchases resulting in higher inventory, but also on builders as it increases the cost of construction financing.

Despite a decline in the average 30-year fixed mortgage rate from a recent peak of 7.22% in early May to 6.87% this week, the housing market remains under pressure. Existing home sales slipped again for the third month in a row as home prices hit a record high (Chart 2). Buyers continue to be weighed down by high prices and rates, with little prospect of relief in the near term as the Fed continues to exercise patience with respect to rate cuts.

Looking ahead, the central bank’s preferred inflation gauge is out next week. Fed governors and market participants alike will be eager to see how much of the recent easing in the Consumer Price Index will flow through to the Personal Consumption Expenditure measure. Perhaps the Fed will find more of that “consistent data” they require to support a less restrictive policy stance.

Shernette McLeod, Economist | 416-415-0413