Financial News for the Week of September 1st, 2023
Financial News Highlights
- The U.S. economy added 187k jobs in August, but revisions to the two prior months subtracted a notable 110k jobs from the previous reported tally.
- Both total and core PCE inflation rose by 0.2% month-on-month in July, equal to the monthly change seen in June for both measures.
- Hurricane Idalia, the first of the season to make landfall in the U.S., caused widespread flooding and wind damage through Florida’s Big Bend region and up through Georgia and the Carolinas.
The Labor Market Takes a Holiday
The U.S. almost managed to escape August without a major hurricane, but unfortunately those hopes were dashed when Hurricane Idalia made landfall as a category 3 hurricane on Wednesday in Florida in non financial news. Strong winds, rain, and storm surges caused widespread flooding and property damage, leaving hundreds of thousands of Americans without power across the Southeast. Although the extent of the damage is still being assessed, insurance and clean-up costs are expected to be well over a billion dollars.
Fortunately for the national economy, sunnier skies could be found in this week’s economic data, including the 187k new jobs added in August. While this reading, in addition to the downward revisions to the previous two months, marks a continued moderation in the pace of hiring, it indicates that supply and demand in the labor market are coming into a more sustainable alignment (Chart 1). This was further evidenced by the decline in job openings in July, with the job opening to unemployed ratio falling to 1.5 in financial news. While the unemployment rate did rise to 3.8%, this mostly resulted from a boost in labor force growth which could be considered a net positive if it helps to offset labor shortages. On aggregate, this progress will come as positive news for the Federal Reserve, however the most recent data on inflation was slightly more mixed.
On Thursday, we saw that PCE inflation rose by 3.3% year-on-year (y/y) in July, up from 3.0% in June. This was driven by a moderation in the negative base effects resulting from the spike in energy prices last year in addition to a moderate uptick in services inflation – driven entirely by Powell’s ‘supercore’ component. Looking at the 3-month annualized trend (Chart 2), 
we can see that total inflation is pushing closer to the Fed’s 2% target, though this is likely to be short lived given the recent move up in energy prices. In addition, while core inflation is moving in the right direction, non-housing core services have barely budged from their cyclical highs and continue to run at an elevated annualized pace. Until we see a meaningful cooling here, core inflation will likely remain north of 3%.
Some offset to inflationary pressures continues to be provided by the goods sector, with the ISM Manufacturing Purchasing Managers’ Index (PMI) showing manufacturing activity contracted for a tenth consecutive month in August. Ten out of sixteen industries reported lower input prices, which is likely factoring in downstream to the consumer. Price growth in the services sector has been more stubborn, so next week’s update on the ISM Services PMI will offer insight into how resilient the sector remains.
With the Labor Day holiday on Monday, next week will be short both in length and in the volume of economic data that we receive. However, the release of the Fed’s Beige Book will be one item to watch, as it will feed into the viewpoints that FOMC members bring to the upcoming meeting. We expect that the progress on inflation and job market cooling up to this point will be sufficient to warrant a hold in 2 weeks’ time, but the tone will likely remain hawkish to guard against the potential for pre-mature easing in financial conditions.
Andrew Foran, Economist | 416-350-8927
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of August 25th, 2023
Financial News Highlights
- Speaking at the Jackson Hole Economic Symposium on Friday, Chair Powell noted that some progress had been made on the inflation front, but that inflation was still “too high”. He noted that the Fed would proceed carefully in either tightening the policy rate further or holding it constant as it watches the data.
- Existing home sales were one piece of data reacting strongly to higher rates, falling further in July. Inventories remained lean, at 42% below pre-pandemic levels.
- Lack of supply in the existing market continues to push buyers to the new market, with sales there up strongly in July.
Fed Chair Powell Sticks to Tough Talk
In a relatively quiet economic data week, markets took their cue from Chair Powell’s Jackson Hole Economic Symposium speech in financial news. The annual speech is always a highly anticipated event, but this year’s was particularly important with the Fed being at a monetary policy pivot point. The speech struck a balance between acknowledging that some progress had been made on inflation, but that it remained “too high” with substantial ground to cover to get back to price stability. Equity and bond markets didn’t like this reminder and were down on Friday (at time of writing).
The Chair noted the FOMC was prepared to “raise rates further if appropriate”, and that it intended to hold policy at a restrictive level until confident that inflation was moving sustainably down toward its objective (see commentary). However, given that they are navigating in a cloudy environment, they would proceed “carefully”. What appeared to be off the table was any indication of potentially lowering rates, thus giving the speech a more hawkish tilt in our view. We believe that the continuation of this tough talk is necessary to prevent an undesirable give back in bond yields and, ultimately, to help keep inflationary expectations in check as it continues to monitor the data closely (see here).
Powell provided a little more detail into the factors that will go into policymaking by breaking down inflation into three key categories. This included core goods inflation, along with housing and non-housing services. He noted progress on all three. On non-housing services – a category also known as “supercore”, which accounts for over half of the core PCE index – annual inflation has moved mostly sideways, but encouragingly it has started to decline on a three and six-month basis. Meanwhile, housing services inflation is expected to continue to ease given well-known lags (see here), but they will be watching market rent data closely.
Speaking of housing, existing home sales continued to head lower in July (see commentary). With mortgage rates some 40 basis points higher than in the two months prior it is no wonder that activity pulled back. The elevated rate environment also poses a hurdle on the supply side, as existing homeowners with much lower mortgage rates are reluctant to move and take on a higher rate. This theme is evident in inventories, which were 42% lower than pre-pandemic July levels (July 2019).
The tightness in resale market has kept a floor on home prices, while also pushing more would-be buyers to the “new” home market. New single-family home sales continue to buck the broader negative trend, making additional gains in July (Chart 1). This has been much to the delight of homebuilders, who have looked to boost supply in the single-family sector in financial news. While this trend may have some more room to run, mortgage rates have pushed even higher recently and are now hovering in the 7.2-7.5% range (Chart 2). This could test the strength of the positive single-family homebuilding trend sooner than anticipated, as evidenced by the recent pullback in homebuilder confidence and some flattening in single-family housing permits. Ultimately, it all ties back to interest rates, which, given the Fed’s continued tough talk, appear set to remain higher for longer.
Admir Kolaj, Economist | 416-944-6318
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of August 18th, 2023
Financial News Highlights
- The big news this week was U.S. Treasury yields reaching the highest point since 2007 thanks to a string of positive economic data releases. The 10-Year yield reached 4.30% on Thursday, surpassing last October’s high.
- July’s retail sales data was one of those positive releases, as a stronger-than expected monthly gain underscored the resilience of the consumer. And July housing starts was another: starts rose modestly despite high mortgage rates. Mortgage rates hit a 21-year high this week, in line with higher Treasury yields.
- The FOMC minutes also played a role taking yields higher, as they showed that Fed officials see upside risks to inflation, which may warrant further tightening in the policy rate.
Yields Drift Higher, As Macro Narrative Shifts
U.S. Treasury yields continued to climb higher this week, following a string of positive economic data releases in financial news. With the macroeconomic narrative shifting away from recessionary back towards soft landing, investor sentiment has also swung back in favor of rates needing to stay ‘higher for longer’. Current market pricing on the fed funds rate doesn’t fully price in the first rate cut until May of next year, with a relatively shallow trajectory on the policy rate through H2-2024. This is a sharp U-turn from just a few months ago when market participants had priced over 100 basis points of cuts through the second half of this year alone! As a result, yields across the curve are well off their April lows and have now even surpassed last October’s highs (Chart 1).
Nowhere has the theme of resilience been more on display than across the consumer segment, and that narrative has clearly carried over into the third quarter. Retail sales for July surprised even the most optimistic forecast, rising by an impressive 0.7% month-on-month (m/m) – its strongest monthly gain since January. Stripping out the most volatile items such as sales at gasoline stations, auto dealers and building supply stores showed even more strength – rising 1.0% m/m – with the largest gain coming from non-store retailers (+1.9% m/m). Indeed, some of the extra vigor was likely due to Amazon Prime Day – suggesting we could see some giveback in the months ahead. However, spending was fairly broad-based across most categories, with 9 of 13 retailers reporting gains. Even being conservative on our monthly assumptions for August/September, Q3 consumer spending is still tracking somewhere close to 3%, nearly doubling last quarter’s gain of 1.6%.
In contrast to the consumer, the housing sector has been one area of the economy that has certainly felt the impact of higher interest rates over the past year. But even here there are some early signs of stabilization. Home construction ticked modestly higher last month, rising by 3.9% m/m to 1.45 million units in financial news. Gains were entirely in the single-family segment, which are now up 22% from last November’s low. Flattening material costs alongside a shortage of lived-in homes for sale have been key factors underpinning construction activity across this segment in recent months. Still, further gains over the near-term seem limited. Permitting activity – a good leading indicator of future projects – has flattened in recent months, while builder confidence ticked down for the first time in 7 months in August alongside the recent surge in mortgage rates, which currently sit at a 21-year high of 7.1% (Chart 2).
Given the continued resilience in the economy, it’s no wonder the minutes from the FOMC’s July 25th-26th meeting showed that the majority of members think the inflation fight is far from over and could require additional tightening in the months ahead. Most forecasters are tracking +3% growth for the third quarter and the Atlanta Fed’s forecasting model is predicting 5.8%! While recent readings on inflation have been favorable, the economy will need to slow considerably to keep sustained downward pressure on inflation without requiring further rate hikes.
Thomas Feltmate, Director & Senior Economist | 416-944-5730
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of August 11th, 2023
Financial News Highlights
- The U.S. economy had good news on the inflation front this week, as core inflation ticked down in July, even as unfavorable base-effects led to a marginal uptick in the headline measure.
- Some Fed speakers this week maintained a hawkish stance, suggesting September’s meeting is an open debate. Incoming inflation and labor market data will play a key role in the decision.
- Small businesses also showed signs that inflation is easing, with fewer of them raising or planning to raise prices.
Word of the Week is Inflation
Since skyrocketing during the pandemic, inflation has been a key feature of the economic landscape in financial news. With both consumer and producer price data out this week there was much to add nuance to the scenery. Headline CPI inflation for July was 3.2% year-on-year (y/y), up 0.2 ppts from the previous month. The slight uptick was largely due to base-effects stemming from a notable decline in July 2022 energy prices. The monthly figure was more muted with a 0.2% increase, in line with expectations. Core prices also rose 0.2% month-on-month (m/m) contributing to a deceleration of annual core inflation from 4.8% in June to 4.7% (Chart 1).
Producer prices on the other hand rose slightly more than expected in July (0.3% m/m) due to a pickup in services inflation (0.5% m/m). The uptick in producer prices, which eventually feeds through to consumer prices, illustrates that it may still be too early for the Fed to let its guard down. Nonetheless, these inflation numbers combined with slowing labor market momentum do leave a cloud of doubt about whether the Fed will be raising rates again this year.
Comments from some voting members of the Federal Open Market Committee (FOMC) also suggest that a hike at the September meeting is not a foregone conclusion. NY Fed president Williams noted that both inflation and labor data are generally heading in the right direction, but both are still not quite there yet. He views the question of additional rate increases as still being “open”. Philadelphia Fed President Harker, contrary to his usual hawkish bent, noted that the Fed may be at the point where it can hold rates steady for a while. On the other hand, Fed Governor Bowman is of the view that additional hikes will likely be needed to tame inflation.
Data from the small business sector also supports the notion that price pressures are receding in financial news. The National Federation of Independent Business survey found that only about one-quarter of small business owners raised prices over the past three months, the lowest reading since January 2021 (Chart 2). Likewise, the share of owners planning to raise prices in the near-term retreated by 4 points following two consecutive monthly increases. Additionally, businesses reporting inflation as their single most important problem declined by 3 points to 21% in July. Overall, the survey suggests that price pressures are moderating, despite a still tight labor market.
One thing that could throw a kink in the downward trajectory of inflation, is rising energy prices in the face of crude oil production cuts by Saudi Arabia and Russia. While the Fed’s preferred measure excludes energy prices, rising oil prices will indirectly boost prices in most other categories.
Ultimately, core inflation should drift lower in the coming months. However, the battle is far from over given that the job market remains tight and the economy resilient. The risk that lower inflation could lift real wages and thus aggregate demand, thereby triggering another round of rising prices, means the Fed will be paying even closer attention to the evolution of jobs data.
Shernette McLeod, Economist | 416-415-0413
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial Advisor News for the Week of August 4th, 2023
Financial Advisor News Highlights
- Fitch became the second major credit rating agency to downgrade the U.S. from the top AAA rating, citing the growing fiscal debt burden and an erosion in governance.
- The U.S. economy added 187k new jobs in July, representing the slowest pace of hiring in over two years.
- The Federal Reserve’s Senior Loan Officer Opinion Survey showed credit standards tightened across the board in the second quarter, weighing on loan demand.
Tighter Credit Weighs on Resilience
In this weeks news from the world of a financial advisor, nearly twelve years to the day of the first U.S. credit rating downgrade in 2011, Fitch became the second major rating agency to lower its evaluation of the government’s creditworthiness. Fitch’s rationale was related to growing fiscal deficits in the near-term, medium-term fiscal challenges stemming from aging demographics, and a multi-decade erosion of governance. Since the decision was announced on Tuesday, Treasury yields rose and equities fell, with the ten-year Treasury up 11 basis-points (bps) and the S&P 500 down 1.8% as of the time of writing. Broader implications are expected to be muted as the U.S. economy continues to have strong fundamentals, however it comes at a time when credit standards are already tight.
Monday’s Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) showed that a significant share of banks had tightened business and consumer lending standards in the second quarter. Unsurprisingly, demand for most loan types fell over the period, with the only exception being credit card loans, which saw no change in demand. The economy is clearing feeling the effects of the rapid rise in interest rates over the past 17 months.
Despite tightening credit conditions, pockets of resilience remain. The ISM PMI data this week continued to show a notable divergence between the manufacturing and service sectors, with the former contracting for a ninth consecutive month and the latter expanding for a seventh straight month in July (Chart 1). Employment growth in both sectors slowed last month, but the services sector is still creating jobs as demand remains robust, whereas the manufacturing employment subindex hit its lowest level in three years.
Looking more closely at the most recent labor market update, 187k jobs were created in July, which along with the revised reading for June, represent the slowest pace of job creation in over two years (Chart 2). While this puts job growth on a more sustainable footing, the labor market remains tight, as evidenced by the 4.4% year-on-year(y/y) growth in average weekly earnings in July. The moderation in hiring will be seen as a positive development by the Federal Reserve, but it is unlikely that they will take the prospect of further policy tightening off table until the sustainability of the trend is determined from a financial advisor perspective.
The Fed will get another important indicator next week in the form of the CPI inflation reading for July. June’s print showed core CPI fell below 5% y/y for the first time since December 2021 and the Federal Reserve will be looking to see further progress. With preliminary evidence that the cumulative effects of past rate hikes are working to cool inflationary pressures, we expect that the FOMC will leave the policy rate unchanged when they meet in September. However, they are likely to continue to emphasize the importance of incoming data on determining the future path of interest rates as the ultimate form of ‘landing’ for the economy becomes clearer.
Andrew Foran, Economist | 416-350-8927
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of July 28th, 2023
Financial News Highlights
- Fed Chair Powell signaled a meeting-by-meeting approach on changes to the fed funds rate, opting to evaluate incoming data and fine-tune interest rates to help temper inflation.
- The second quarter’s GDP release showed an economy that continues to chug along at a solid pace – exceeding expectations for a steeper slowdown.
- The Fed will keep rates in restrictive territory into next year so, even if a recession is avoided, tepid economic growth is to be expected.
Preparing for Landing
Readers would be right to ask, what’s “moderate” about another upside surprise to economic growth in the second quarter for financial news? Fed Chair Powell signaled a meeting-by-meeting approach on changes to the fed funds rate, opting to evaluate incoming data and fine-tune interest rates to help temper inflation. Incoming data have shown that the economy remains resilient – buoyed by healthy consumer spending growth and business investment – as fears of a recession gradually fade. What remains to be seen is whether inflation will continue to moderate in the coming months or whether the Fed will have to push interest rates higher still – thereby raising the odds the economy contracts.
The second quarter’s GDP release showed an economy that continues to chug along at a solid pace – exceeding expectations for a steeper slowdown in financial news. However, the composition of growth was interesting. In line with our forecasts, consumer spending growth advanced 1.6% quarter-on-quarter (q/q) annualized – slowing from 4.2% in Q1. The Fed will be reassured that its rate hiking cycle is filtering through to consumer behavior as spending growth slows despite a drum-tight labor market. Moreover, with rates at multidecade highs, the housing market is feeling the force of tight financing conditions, with residential investment continuing to pull back in the second quarter – now contracting for the ninth quarter in a row. With demand growth slowing, imports pulled back again – now having contracted for the third time in the past year. The gradual slowdown is also not unique to the U.S., as plummeting export growth indicates the global economy is slowing under the weight of inflation and higher interest rates.
A pleasant surprise in the data was the healthy activity in the business sector that provided a meaningful lift to the economy (Chart 1). Nonresidential investment advanced 7.7% q/q – good for the strongest showing since the first quarter of 2022. The flow of federal funds to support climate friendly investments is helping fuel the ongoing strength in structures and equipment investment – the latter registering its best quarterly growth rate since 2011, outside of the post-2020 lockdown bounce.
With full second quarter data showing a healthy consumer, all eyes were on June’s personal income and outlay report for signals of spending and price momentum heading into the summer months. Healthy spending held up in June and outstripped income growth, denting the personal savings rate. Between higher interest rates, strong inflation and depleting savings the pandemic era spending binge is slowing down. This is music to the Fed’s ears as it means softening inflationary pressures. Needless to say, the downside surprise on core PCE inflation (4.1% year-on-year vs. 4.2% expected) was a particularly welcome development. Even more encouraging, the near-term trend (Chart 2) has eased to its slowest pace since March 2021.
With inflation slowing and consumer spending remaining resilient the odds of a soft landing are ticking higher. However, the Fed will keep rates in restrictive territory into next year so, even if a recession is avoided, tepid economic growth is to be expected.
Andrew Hencic, Senior Economist | 416-944-5307
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of July 21st, 2023
Financial News Highlights
- Retail sales disappointed market expectations overall in June, but underneath the surface sales in the control group, which are used to calculate consumption, were much stronger, rising 0.6% on the month.
- Elevated mortgage rates and low inventories continue to weigh on existing home sales. The latter resumed their downward trend in June.
- Housing starts also fell in June. But, permitting data reveals a clear divergence between an upward trend in single-family permits and a downswing in multifamily permits.
Economic data this week wasn’t entirely positive, but it still pointed to an economy that continues to chug along at a decent clip in financial news. With no major red flags on the way, the Fed has the green light to hike the policy rate once more next week, before likely hitting the pause button.
While we expect the labor market to cool ahead, recent high frequency data still points to resilient demand for workers. Continuing jobless claims rose in the week ending July 8th, but initial claims continued to trend lower, easing for the second week in a row last week. With unemployment near multidecade lows, June retail sales suggested consumers are still spending, even as inflation bites into purchasing power. Headline retail sales growth was below market expectations, but an upward revision to the month prior helped provide some offset in financial news. The headline was dragged down by lower sales at gasoline stations, and at building material and garden equipment stores. A notable deceleration in sales at auto and food service establishments didn’t provide much support either. Stronger momentum was seen in the control group, which are used to calculate personal consumption expenditures, with sales rising 0.6% m/m – continuing a healthy pattern for the quarter.
Consumers weren’t as upbeat on homes, with existing home sales resuming their downward trend in June (see here). Elevated mortgage rates are likely to have been a major hurdle, given the tight relationship with sales recently (Chart 1). The higher rate environment has persisted through the first half of July, suggesting that there’s no turnaround in sight for the weakness in existing home sales. Low inventory is also restraining activity. There were only 1.08 million homes for sale in June – 170k less than last year and 840k less than in June 2019 – making for slim pickings.
As we note in a recent report, the tight conditions in the resale housing market are pushing more people toward the new home market. This is much to the delight of homebuilders, whose confidence has been improving rapidly since the start of the year. This optimism has been confined to the single-family segment, however. Multifamily homebuilders have been pulling back. Housing starts retreated in June in both segments, but permitting data reveals a clear divergence between the two segments (Chart 2). The recent softness in the multifamily space is consistent with a rise in the multifamily vacancy rate, and a record-setting number of units under construction in June.
All told, interest-sensitive areas of the economy remain under pressure. But with the employment backdrop continuing to hold up well, consumers still spending, and inflation appearing to move in the right direction, chances of a soft-landing look to have improved. The Federal Reserve is nonetheless expected to maintain a tightening bias over the near-term, and is almost certain to hike the policy rate once more next week. A Fed hike is fully priced in by markets at this point. Provided inflation continues to cool, this will likely be the Fed’s last hike this cycle.
Admir Kolaj, Economist | 416-944-6318
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of July 14th, 2023
Financial News Highlights
- Financial markets rallied this week following a string of promising data pointing to easing U.S. inflationary pressures.
- Inflation as measured by the Consumer Price Index fell to the slowest pace of growth since March 2021 in June. Core inflation also only increased modestly on the month. Input costs also trended lower last month, with the Producing Purchase Index falling to the lowest reading since August 2020.
- Though the data overwhelmingly point to easing inflationary pressures, the Federal Reserve is still expected to deliver another 25 basis-point hike later this month.
Inflation Data Brings A Healthy Dose of Optimism
Sentiment across global financial markets firmed this week following a lower-than-expected reading on U.S. inflation in financial news. Recession fears have been top of mind for investors over the past year amidst the Federal Reserve’s most aggressive tightening cycle in several decades. But signs of cooling inflation provided a dose of optimism that policymakers might achieve a goldilocks scenario of returning price stability without tipping the economy into recession. At the time of writing, the S&P 500 is up 2.5% on the week, WTI has rallied by just over 4% to $76 per-barrel, while yields across the board traded lower by approximately 20bps. The 10-Year Treasury yield currently sits at 3.8%.
The Consumer Price Index (CPI) eased to a 3.0% pace y/y in June – the lowest reading since March 2021. But, perhaps more notable, core inflation rose by just 0.16% m/m – the slowest pace of growth in 28 months – and dipped to 4.8% y/y. A hefty decline in travel related services underpinned last month’s deceleration, as well as a continued deceleration in shelter costs (Chart 1) in financial news. Used vehicle prices also fell by a modest 0.5% m/m, which came after outsized gains in each of the two-months prior.
Looking to the months ahead, there’s good reason to remain optimistic that further progress will be made on the inflation front. For starters, the much anticipated slowing in shelter costs now appears to be firmly intact, with both owners’ equivalent rent (OER) and rent of primary residence (RPR) having decelerated in recent months. More importantly, current market-based measures of rent continue to show rental costs slowing, which means further disinflationary pressure on OER and RPR as more leases roll over.
On the goods side, used vehicle prices are expected to be a source of downward pressure on inflation in the coming months. Wholesale auction data for used vehicle prices have tumbled in recent months, with the pass-through to the consumer measure typically taking 2-3 months. (Chart 2). Outside of this category, prices across all other goods have already been flat for three consecutive months and are likely to trend lower through the second half of this year alongside weaker consumer spending. Input costs are also trending favorably. The June reading on the Producer Price Index (PPI) showed that the 12-month change slowed to just 0.1% for final demand products – the lowest reading since August 2020.
Though the recent string of data overwhelming point to a continued easing in inflationary pressures, it is widely expected that Fed will deliver on another 25bps rate hike later this month. No matter which way you slice it, core inflation on a 12, 6, and 3-month annualized basis is still running at a multiple of the Fed’s 2% inflation target. And, with the labor market continuing to exude considerable resilience, policymakers will need to see more convincing evidence that the disinflationary process is firmly intact before calling it quits. Fed Chair Powell has repeatedly emphasized the risk of ‘stopping short’, so the FOMC is likely to maintain a tightening bias over the near-term as they continue to monitor incoming data and fine-tune the end point of its tightening cycle.
Thomas Feltmate, Director & Senior Economist | 416-944-5730
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of July 7th, 2023
Financial News Highlights
- The week’s economic data was consistent with an economy that remains resilient, if no longer as robust as it was.
- Performance in the manufacturing and services sectors continued to diverge. The June ISM index showed manufacturing contracted for the eighth consecutive month, while services continued to expand six months in a row.
- The overall resilience will likely keep the Fed in hiking mode later this month, as the job market remains tight and wage growth stronger than the Fed would like. The FOMC minutes revealed that a few members favored a hiked at the June meeting, even if they did not formally dissent on the decision.
Job Market Cooling, But Not Enough
The week that was showcased a U.S. economy that while cooling, is still too resilient to achieve the Fed’s aim in financial news. First up, the ISM Manufacturing and Services Indexes showed that the goods sector continued to slow, while the service sector continued to expand, albeit at a modest pace. The manufacturing index declined again in June, falling 0.9 points to a 3-year low of 46.0. This marks its eighth consecutive month in contraction territory and points to deteriorating conditions in the manufacturing sector in financial news. The index suggests that demand remains weak in the sector, with new orders still below the 50 mark. Manufacturers have responded by cutting both production and employment (with both sub-indexes coming in below 50). The survey result is consistent with data on consumption expenditure (see here), which showed real spending flat in May and expenditure on goods pulling back by 0.4% on the month.
While a cool down on the goods side will be welcomed by the Fed, the real sticking point is still strong demand on the services side of the economy. The ISM services index remained in expansion territory for the sixth consecutive month in June, highlighting the divergence between the two indexes (Chart 1). While expanding, the services index is still off recent highs, and is consistent with a modest pace of growth in the broader economy. One factor likely to impede growth however is the looming resumption of student loan debt repayments, which combined with a softening labour market and rising interest rates, could reduce consumer spending and growth even further.
Fears about a softening labor market, however, may be more accurately characterized as normalization after the white-hot levels attained during the pandemic. The job opening and labor turnover survey for May showed that over 4 million American workers quit their jobs (250k more than the previous month) and that there were over 9.8 million job openings available. This morning’s jobs data reinforced the picture of a normalizing, but still strong labor market. The report showed firms added 209k jobs, easing from May’s 306k. The unemployment rate also pulled back 0.1 ppts to 3.6% (Chart 2). Taken together, the employment reports are indicative of a relatively resilient labor market despite a more than year-long campaign of rate hikes by the Fed to quell inflation.
In that regard, minutes of the June FOMC meeting revealed that the decision behind the Fed’s first pause may have been unanimous, but some committee members would have supported raising rates. Concerns about the effects of past rate increases though tempered desires for a hike, with the resultant “hawkish pause” in June.
With the services sector and labor market still showing resilience, the Fed is justified in signaling more hikes to come. This will have to be balanced against the hit to consumer spending from the resumption of student loan payments and a possible trade squabble with China over high tech as the two countries impose tit-for-tat measures. The balancing act the Fed is currently undertaking is a delicate one, and they will have to tread cautiously as they walk the tightrope to engineer that elusive soft landing.
Shernette McLeod, Economist | 416-415-0413
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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Financial News for the Week of June 30th, 2023
Financial News Highlights
- A week’s worth of solid data did little to contradict Fed Chair Powell’s comments suggesting more monetary tightening is on the way.
- However, May’s personal consumption expenditure (PCE) report did provide a bit of reassurance for the Fed that demand is slowing down as real expenditure growth has been flat in three of the past four months.
- The problem remains that inflation is showing little sign of relenting and Fed officials are going to stay focused on tightening policy to cool the price pressure.
Healthy Data Keep Pressure on Fed
Fed Chair Jerome Powell noted this week that Fed officials, “believe there’s more restriction coming” from monetary policy in light of the persistently strong economic data in financial news. This week’s data stream did little to dissuade the sentiment. We got healthy prints from the housing market, consumer confidence, and manufacturing orders along with a personal consumption expenditure (PCE) report that showed little sign of core inflation abating. All told, the data underscored that the economy continues to chug along at a firm pace.
First up, activity in the housing market has ticked up. New home sales rose to their highest level since February 2022 in May. The market for new single-family homes troughed in July 2022 and has been trending upwards since, as inventories in the existing home market remain tight (see commentary). Sales in the existing market did move up in May as well, as a solid labor market helps drive demand.
Consumers’ moods have also been improving lately as the Conference Board consumer confidence index for June jumped up to its highest reading since January 2022. With both consumers’ assessment of the present situation and future expectations moved up on the month. Overall, consumers are not as confident as they were prior to the pandemic, likely as they contend with high inflation, but their higher spirits defy the recession warnings in financial news.
The good news didn’t just stop there. The industrial side of the economy saw manufacturers’ new orders of durable goods blow out expectations for a contraction, with a healthy advance. Taking a closer look at a key indicator of business investment, new orders excluding defense and aircraft advanced a solid 0.7% in the month, and 0.3% month-on-month when stripping out the effects of inflation.
However, May’s consumer spending report suggests that demand has paused from its strong start to the year. Real expenditures were flat for the third time in fourth months, as an advance in services spending was offset by a drop in goods spending. Moreover, it looks like consumers are adjusting habits as they save a bit more of their disposable income. The personal savings rate ticked up to 4.6% in May, nearly two percentage points higher than its low registered in June 2022 (Chart 1). With the Supreme Court striking down the Biden administration’s student debt relief plan today, and a separate student loan payment moratorium set to end, headwinds to the consumer spending outlook continue to build heading into the second half of 2023.
However, inflation continues to be problematic. Core PCE inflation (Chart 2) is showing little sign of relenting, up 4.6% y/y, with the near-term trend cruising along at 4.4% (annualized). Inflation has been stuck well above the two percent target, which is likely to keep officials focused on tightening policy to cool it down. Markets are looking for the Fed to hike rates again this year by another 25 basis points – taking the policy rate to a 22-year high of 5.5%. The FOMC’s next decision is at the end of July, giving it some time to see a few more readings on economic momentum before making its decision. Next week’s June jobs data is likely to be a key piece of it’s calculus.
Andrew Hencic, Senior Economist | 416-944-5307
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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