Financial News for the Week of May 26th, 2023
Financial News Highlights
- Negotiators appeared close to a deal to raise the debt ceiling and set spending levels. However, the deal does not address Washington’s medium-term fiscal challenges, which were part of the reason Fitch put the U.S. on a negative watch.
- Consumers continued to spend at a healthy clip in April, contributing to sustained inflation pressures. We continue to expect spending to cool as the year goes on, helping to ease inflation, eventually.
- In the meantime, the Fed is in a tough spot. It will need courage to pause and wait for the full impact of its past tightening to show up.
“Discretion” Is the Better Part of Valor in Washington
Thankfully, negotiators appeared close to a deal to raise the debt ceiling as of Friday morning in financial news. It looks like the two-year deal would cap discretionary spending and raise the debt ceiling through the 2024 election, avoiding the worst-case scenarios. However, ratings agency Fitch had cited the “failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges” as a reason for putting the U.S. on a negative watch, and this deal does not change that.
Congress has taken the Shakespearean proverb “discretion is the better part of valor” literally. The Bard’s original intention was a criticism of a lack of honour and courage in focusing on discretion. The debt ceiling deal only tinkers around the edges of the larger issue of a structural deficit on the order of 6% of GDP.
Discretionary spending accounts for only 27% of total federal government outlays, and the federal deficit is estimated to be $1.5 trillion in 2023. As shown in Chart 1, Congress would need to cut discretionary spending nearly to zero to balance the books if they only address discretionary spending. To seriously address the deficit, it needs to take the more courageous steps and look at mandatory spending – namely entitlements like social security and Medicare. Or, it needs to find a way to grow revenues at the same pace as population aging. Alas, courage seems in short supply in Congress these days.
Speaking of discretion in spending, real consumer spending was up a healthy 0.5% month-on-month in April in financial news. Spending was driven by robust gains in outlays on both goods and services. Monthly spending data has been very choppy over the past six months but comparing it to real income less transfer payments (which is a key recession indicator used by the NBER), you see that the upward trend in spending is outpacing real income growth (Chart 2).
Thanks to a strong labor market, real income gains have held up. Added to the cushion of excess savings built up during the pandemic, the consumer has been able to keep spending in the face of very high inflation, in turn contributing to demand-driven inflation pressures. Chart 2 suggests that spending is set to slow – even if the labor market doesn’t cool. About 60% of the excess savings cushion has been spent, and spending cannot outgrow income indefinitely before consumers will need to tighten their belts.
We expect that belt tightening to be in greater evidence as the year goes on. After consumer spending grew by 3.8% annualized in Q1, it is tracking a more modest 2% in Q2. We expect it to fall below 1% in the second half of the year, which will help to dampen inflationary pressures. Until then, the Fed is on the horns of a dilemma.
Its preferred inflation gauge, the core PCE deflator, remained around where it has been all year at 4.7% year/year in April. Markets are judging this could mean the Fed should push a bit harder on rates, with market odds tilting slightly in favor of another hike in June. We believe that the Fed will need to hold its courage and pause and assess the impact of the significant monetary policy tightening that has not yet had its full impact on economic growth.
Leslie Preston, Managing Director & 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 May 19th, 2023
Financial News Highlights
- Financial markets remained eerily positive this week, despite the debt ceiling X-date looming with no bipartisan deal in sight.
- Retail sales data for April showed the continued resilience of the U.S. consumer, while housing starts are looking to have reached a bottom after having fallen 24% last year. Home sales were lower in April, and likely have a bit further to fall.
- Fed speakers diverged this week on the near-term trajectory of the fed funds rate. Financial markets are still pricing 50 bps of rate cuts by year-end.
Optimistic Markets Cheer the Small Wins
Risk sentiment remained eerily positive across global financial markets this week, despite the clock ticking down on the debt ceiling X-date (see report) in financial news. But instead of losing the forest for the trees, investors seemed to cheer the incremental progress made this week. President Biden and Speaker McCarthy, and their negotiators, met on Tuesday for a closed-door meeting, where there appears to be some common ground on several items including clawing back unspent pandemic relief funds, speeding up permitting of domestic energy projects, and applying stricter work requirements for some social safety net programs. However, the two parties remain deeply divided on the size of broader spending cuts. At the time of writing, equity markets are looking to end the week up 2%, while the 10-year Treasury is up 25 bps to 3.71%.
Turning to the economic data, retail sales data painted a picture of a still resilient consumer in April. Although headline retail sales (+0.4% m/m) came in below expectations (+0.8% m/m), this was partially the result of a pullback in gasoline sales – largely a price- driven decline. The headline was also weighed down by weaker growth in motor vehicle sales, despite wholesale auto sales showing a healthy gain last month in financial news. After removing the volatile items, the control group – a more precise measure of consumer spending – rose by a healthy 0.7% m/m. This suggests continued momentum for Q2 consumer spending, with our current tracking around 1%-1.5%.
Data out this week on the housing market showed existing home sales fell by 3.4% m/m to 4.28 million units in April. The pullback comes after sales had shown signs of life earlier this year. However, much of that activity was the result of a pullback in mortgage rates that had occurred between October-January. Since then, mortgage rates have again turned higher, and at 7.1%, are not far off last year’s highs. Not only has this kept new homebuyers on the sidelines, but it has also discouraged move-up buyers from listing properties, which has kept inventory levels near historic lows (Chart 1).
While home sales likely have a bit more room to fall, housing starts may have already reached a bottom. Residential construction rose 2.2% m/m to 1.4 million in April, with gains seen across both the multifamily (+3.2% m/m) and single-family (+1.6% m/m) segments. Permitting activity points to an uptick in construction in the single-family segment over the coming months, though this will likely be offset by some pullback in multifamily, which has yet to feel any correction through this tightening cycle (Chart 2).
Several Fed speakers this week showed a growing divergence among committee members on the near-term trajectory of the fed funds rate. While a few officials endorsed another rate hike, others are favoring a pause given the recent banking turmoil and the uncertainness it poses to the economic outlook. However, all officials still support rates remaining elevated through this year, which remains at odds with market pricing where 50 bps of cuts are still expected by year-end.
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 May 12th, 2023
Financial News Highlights
- Inflation eased modestly in April, with headline and core CPI both ticking down by 0.1 percentage points to 4.9% and
5.5% year-on-year respectively. - The Federal Reserve’s Senior Loan Officer Opinion Survey showed that a higher share of commercial banks tightened
credit conditions in April than January. - A meeting between President Biden and Congressional leaders failed to yield any progress on negotiations to raise/suspend
the debt limit.
Inflation Continues to Cool in Earnest
On the heels of last week’s FOMC meeting, we were provided with a host of economic data this week to assess the Fed’s new wait-and-see approach, including April’s CPI report in financial news. In addition, we also received the second quarter Senior Loan Officer Opinion Survey (SLOOS) and had a meeting between President Biden and Congressional leadership as they attempt to find an agreement to raise the debt limit. Markets ended the week relatively unchanged, with the S&P 500 down 0.1% and the ten-year Treasury Yield down 4bps at 3.41% as of the time of writing.
Inflation eased modestly in April, as headline inflation rose by 4.9% year-on-year, down modestly from 5% in March (Chart 1). Energy prices rose for the first time in three months as gasoline jumped by 3% month-on-month (m/m), and food prices were flat for a second consecutive month. Stripping out energy and food, core inflation ticked down to 5.5% y/y, having fluctuated between 5.5-5.6% y/y since January in financial news. While we did see shelter inflation decelerate for a second consecutive month, it still rose by 0.4% m/m. This in addition to the reacceleration in core goods inflation, worked to keep core inflation elevated. Although on aggregate this report had positive developments, it reiterated the fact that the path back to the Fed’s 2% target is unlikely to be a straight line.
Of particular concern for the Fed is the potential for inflation expectations to become de-anchored. In the New York Fed’s Survey of Consumer Expectations this week, we saw three-year ahead inflation expectations rise for a second consecutive month to 2.9% in April (Chart 2). While this series has historically run slightly above the Fed’s 2% target, a sustained movement above 3% would be a concern for the FOMC.
Earlier in the week, we saw that U.S. commercial banks continued to tighten credit conditions in April in the Fed’s SLOOS. Commercial & industrial loans as well as commercial real estate (CRE) loans saw a higher net percentage of banks tightening credit standards than in January. Demand for these loans from businesses fell as a result, however household demand for consumer-facing loans (mortgages, auto, credit card, etc.) rose as credit remained relatively accessible. Further analysis of the SLOOS can be found here.
Lastly, in the Oval Office this week, President Biden met with Congressional leaders on Tuesday to attempt to find an agreement to raise/suspend the debt limit. Treasury Secretary Yellen warned last week that the Treasury could run out of funds by early June, thus the impetus to reach an agreement is elevated. However, no progress has been made in the negotiations so far.
Looking ahead to next week, we will get a fresh update on the U.S. consumer with April retail sales as well as existing home sales. With the unemployment rate back down to 3.4% consumers may still have some wind in their sails, but we expect that this will be short-lived as past rate hikes continue to filter through the economy.
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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Featured Article: In Retirement, We Have More Time Than Ever. But We Want to Use It Wisely.
In Retirement, We Have More Time Than Ever. But We Want to Use It Wisely.
We have fantasized about this moment for decades. The trick is learning how to savor it.
Steve
Stephen Kreider Yoder
For the first time in many years, time isn’t money.
That was never more clear one afternoon earlier this year when we were gazing down at the Mediterranean Sea while sipping coffee in a cafe in the town plaza in Bejaia, Algeria. We had no fixed plans for the day or the next week—just as planned.
We suddenly have time in abundance, now that we’re both retired, and we’re learning how to spend this currency that for decades has been so scarce. We can now linger where we want to be and dally over what we want to do.
Algeria was an ideal place to test this new reality. We had visited in 2019, but could afford only two weeks, what with full-time jobs—far too short for a country roughly 3.5 times the size of Texas. “We need more time there,” I said as we flew home.
This year, we could take nearly twice as long to immerse ourselves in what the country offered: a green coastal region that gives way to the golden Sahara; a mosaic of Arab, Berber, French and other cultures; Roman Empire ruins; good food and wine; some of the most hospitable people we’ve met.
We’ve been fantasizing about this time in life since we got married. For decades, time was a rare commodity, and we had to spend a lot of money to acquire it. We paid an absurd price for a house in San Francisco, partly to limit our commutes. We often hired others to do tasks I enjoyed, like fixing our cars or restoring the trim on our Victorian.
“We need more time” was our constant lament, at no time more than during travel. We would shoehorn several countries into two-week tours. We liked to travel abroad on a low budget—it got us closer to the reality of wherever we were—but that took time, and we often didn’t have the luxury.
We have it now. Earlier this year, we rode the Amtrak California Zephyr to Iowa, rather than flying, to see my parents. It was about 48 hours each way, but what was the hurry? We got beds, three meals a day and a rolling display of Western America. We extended our stay with Mom and Dad to a full week.
Back home, I fired up the metal lathe to fine-tune a bearing-cup press I had made earlier—a bike tool that worked fine but which I had great fun fussing with for hours to refine it. I’ll soon solicit bids for scaffolding, so I can start restoring trim.
It’s beginning to occur to us: By saving money assiduously during our 44 years of marriage, we weren’t putting away only funds. We were also accumulating time to spend in retirement.
Money, at long last, is time.
Karen
Karen Kreider Yoder
I’ve never been more aware of the finite nature of time. We’re rich with it now, but there’s no guarantee how long those riches will last. At best, thanks to the longevity that runs in our families, we may have 30 good years of life left. That feels like a long time—and no time at all.
So I’ve been thinking: Maybe we should be budgeting our time like we budget money.
Should I, for instance, spend some of my newfound wealth of time on things I’ve loved to do all my life but had to cut back on while I was working? During the busy years of my career, I continued to make quilts, but had to leave many undone. I baked my own granola and whipped up many meals for friends, but found myself ordering out or picking up prepared foods from the grocery store to save time.
Yet now that I have the luxury of time, the opportunities to fill it have also grown. And that means I still find myself weighing how to spend it—and when to keep spending money instead. I still love to create things, for instance, but would I rather sew an original outfit from scratch or shop for a less-original affair and bank the time? We have time to do housecleaning now; does that mean we should stop paying someone else to do it once a month?
These aren’t easy questions. As a result, we’re talking about looking at all the large time expenditures on our list—travel, house work, volunteering, organizing photos—and laying them out on an annual budget. That will help us use our time more wisely.
As we talked about in our last column, we also need to do a better job savoring—as opposed to just running through—the time we have. That hit home on our trip to the Algerian Sahara this year. We had blocked off a week to explore the desert, far longer than we would have during preretirement travel. We could finally take a leisurely pace, we told ourselves.
Yet we couldn’t shake the old urge to make each hour pay off. My question when we arrived the first night: “When should we be ready for breakfast in the morning?”
Our Tuareg guide, Habib, laughed. “You get up when you want,” he said. “In the desert, slowly, slowly.”
That became our mantra for the next days as we camped each night in a different swath of the wilderness. We sat around a low table for our morning coffee and baguette with fig jam. “Slowly, slowly,” Habib would say, and we would repeat it after him.
“Slowly, slowly,” he cautioned as we set off scrambling over rocks toward ancient pictographs. After lunch under a cool tree, we would chat and read and nap. “Slowly, slowly,” we would chant, and again in the evening as Habib stoked a small fire to heat tea, pouring it back and forth between two pots until it foamed into a thick, sweet brew. We brought that mantra home from Algeria. We’ve got time now, and if we budget it carefully, we can afford to spend it slowly, slowly.
The Yoders live in San Francisco and can be reached at reports@wsj.com.
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Financial News for the Week of May 5th, 2023
Financial News Highlights
- The Federal Reserve hiked the policy rate 25 basis points this week, lifting it to a 16-year high of 5.00-5.25%. Changes in FOMC statement hinted at the potential for a pause, though Chair Powell stated that such a decision had not been made.
- The banking stress continues to fester, with this week marking the failure of another bank (First Republic).
- Though still slowing on a trend basis, hiring ticked up in April, with the economy adding 253k jobs. That was above market expectations for a gain of 180k, but downward revisions to the prior months tempered the optimism.
Fed Lifts Policy Rate to a 16-year High
The Fed followed through with its highly anticipated decision to hike the policy rate by 25 basis points (bps) this week in financial news. This lifted the fed funds rate to 5.00-5.25% – the highest level in 16 years – in what has been a historically aggressive hiking cycle (Chart 1). Changes in the FOMC statement hinted at the potential for a pause, so this could very well be the last hike of this cycle. But, stating this explicitly would not serve the Fed well at this point. In the press conference, Chair Powell tried to keep his options open, stating bluntly that a decision on a pause had not been made.
The Fed’s communication is at odds with market expectations. Markets are dismissing the possibility of further rate hikes and are instead signaling that after a brief pause the Fed will begin cutting rates. Market odds as tracked by the CME Group point to 75 bps in cuts over the last few months of the year. Asked about this divergence, Powell pushed back against the notion of soon-to-come cuts in financial news. In his words, the reasoning is that the Fed sees inflation coming down “not so quickly”, and that if that outlook proves to be broadly correct then “it would not be appropriate to cut rates”.
Fed Chair Powell noted that upcoming policy rate decisions would ultimately be data-dependent, mentioning the usual suspects (i.e., inflation and labor market metrics), while also putting a focus on credit conditions. Tighter credit conditions ultimately serve a similar purpose to rate hikes when it comes to cooling economic growth and inflation. This is something that the Fed considers in setting monetary policy, especially in light of the recent banking stress, with this week marking the failure of another regional bank. Powell had access to the Senior Loan Officer Opinion Survey (SLOOS), due to be released publicly on Monday, and noted that it would show a tightening in credit conditions among small and medium sized banks.
Factoring in the banking stress and tighter credit conditions suggests that the Fed has done enough, but labor market resilience continues. On the one hand, the pace of job creation continues to trend down on a three-month moving average basis. On the other hand, it’s hard to discount the strength in the April jobs report. The economy added 253k jobs last month – well above expectations for 180k. Gains were concentrated in service sectors (+197k). The labor force participation rate held flat at post-pandemic high of 62.6%, while the unemployment rate ticked down to 3.4%, matching January’s multi-decade low. Amidst the ongoing tightness in the labor market, growth in average hourly earnings accelerated both on a year-on-year and month-on-month basis, while other wage measures also point to some resilience (Chart 2).
Should the strength seen in April extend in the months ahead, it could push the Fed to hike a bit more. However, other labor market indicators – such as job openings, which are trending down, and initial jobless claims, which continue to trend up – are not in tune with this view. All told, the upcoming data will continue to bear careful watching, with next week’s CPI report next under the magnifying glass.
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 April 28th, 2023
Financial News Highlights
- U.S. real GDP growth slowed to 1.1% quarter-over-quarter (q/q) annualized in 2023 Q1, from 2.6% q/q in the previous quarter. A measure of underlying domestic demand accelerated to 2.9% q/q, supported by a strong gain in consumer spending, although the monthly pattern revealed that the spending gain was entirely concentrated in January.
- New home sales grew by 9.6% month-on-month in March. While this series is volatile, it has been trending up since the end of last year.
- Core PCE inflation remained elevated in March, easing modestly to 4.6% year-on-year from 4.7% in February.
Core Inflation Remains Elevated, Fed to Hike Next Week
U.S. real GDP growth slowed to a 1.1% quarter-over-quarter (q/q) annualized pace in the first quarter of 2023, from 2.6% q/q at the end of 2022 in financial news. While consensus expectations were looking for a better print, a slowdown in growth was always in the cards as a reversal of the prior quarter’s inventory built-up was expected. That reversal materialized. Government spending, meanwhile, provided an offset, delivering a 0.8 percentage point (pp) contribution to growth. With the combined impact of inventories and government spending adding volatility to the data, we typically look past these items and focus on ‘final sales to private domestic purchasers’ to get a clearer reading of underlying domestic demand. After several quarters of slow growth, this measure accelerated to 2.9% q/q, supported by a strong gain in consumer spending (+3.7%).
At face value, the acceleration in underlying domestic demand is good news. However, monthly spending data shows that the strength was concentrated in January, with growth flatlining over the next two months. Much of the quarter’s strength came from auto sales. Unit auto sales grew from 14.3 million (annualized) at the end of 2022, to 15.3 million in 2023 Q1, resulting in a 1.1 (pp) contribution to GDP. If we remove that impact, the rest of the economy recorded zero growth (Chart 1). While our forecast calls for motor vehicles sales to remain at a high level over the near-term, as pent-up demand is satiated by improved production (see here), this channel is unlikely to offer the same level of support in 2023 Q2.
Residential investment remained a growth detractor for the eight consecutive quarter, but its negative impact moderated noticeably as average declines of 26% q/q in the second half of 2022 eased to 4.2% q/q in 2023 Q1. We expect residential investment to be less of a drag this year, a message echoed by some moderate positive signals out of the housing market. New home sales, a volatile series, continue to trend up since the end of last year, rising 9.6% month-on-month in March. This is happening as tight supply conditions on the existing home market look to be driving some more action towards the new home market. That said, with housing affordability still exceptionally low, buyers are showing increased sensitivity to mortgage rates (though with the typical lag). An index tracking the number of contracts signed to purchase existing homes, a reliable indicator of closed sales, fell 5.2% in March amidst an uptrend in mortgage rates earlier in the month in financial news. The stress in regional banking is also likely to have contributed to the hesitation among buyers to sign housing contracts.
In weighing the Fed’s next interest rate decision, the latest PCE report showed that the Fed’s preferred inflation gauge remained elevated in March. While overall PCE slowed noticeably to 4.2% year-on-year (y/y), from 5.1% in the month prior, core PCE eased only modestly to 4.6% y/y (Chart 2). In our view, core PCE inflation has a long way to return to target (see here). As such, we expect the Fed to hike by 25 basis points next week and keep the policy rate at that high level through the end of the year.
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 April 21st, 2023
Financial News Highlights
- China’s economy saw solid growth in the first quarter, with a strong rebound in consumption and exports after lockdowns were lifted at the end of last year.
- U.S. existing home sales fell by 2.4% month-on-month (m/m) in March, falling from February’s revised 13.8% m/m uptick as past mortgage rate increases weighed on demand.
- FOMC members noted that they continue to monitor credit conditions, but many seem to be in favor of further policy tightening at the next meeting in May.
Housing Falls as the Fed Blackout Period Begins
As earnings season picked up pace this week, markets were closely attuned to the first quarter performance of U.S. companies in financial news. However, the net result on equity markets was muted, as results that were on aggregate moderately positive were partially overshadowed by the downbeat outlook for demand amid the expected economic slowdown later this year. As of the time of writing, the S&P 500 is down 0.5% on the week while the ten-year Treasury yield is up 5 basis-points (bps) to 3.57%.
On the global economic data front, we kicked off the week with first quarter Chinese GDP data, which grew by 4.5% from its year-ago level. The print was better than expected, as pent-up demand from consumers powered growth. China’s economic rebound is expected to be short-lived as consumer exuberance fades and structural headwinds continue to weigh on the economy in the back half of the year.
In the U.S. we had a housing-centric week for economic data, with updates on both existing home sales and residential construction. Data released on Thursday showed that existing home sales fell by 2.4% month-on-month (m/m) in March, pulling back from February’s revised 13.8% m/m increase. Month-to-month changes have been mirroring the volatility seen in mortgage rates (with a lag) as elevated prices have increased the reliance of buyers on financing conditions. While median home prices declined for a second consecutive month relative to year-ago levels (Chart 1), the seasonally adjusted change between February and March was slightly positive. Prices have been held up in part due to low inventory levels. However, new home construction is picking up, with single-family housing starts recovering for a second consecutive month in March, after eleven straight months of declines.
With the Federal Reserve’s pre-meeting blackout period starting on Saturday, we won’t hear from any FOMC members again until Chair Powell’s press conference on May 3rd. Luckily, we heard from ten Fed officials this week, six of whom are voting members. Most of the speakers noted that they were continuing to monitor credit conditions for signs of further stress. The Fed’s regional monitoring in April’s Beige Book stating that “several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity” in financial news. Although this may aid the Fed in tightening credit conditions, as noted by Chicago Fed President Goolsbee this week, most members seemed to agree that further policy tightening would be required to sustainably return inflation to the Fed’s 2% target. As of the time of writing, markets are expecting the Fed to hike by 25bps in May, and then hold in June (Chart 2).
Next week we’ll get a first look at first quarter U.S. GDP and March PCE inflation, both of which are expected to show signs of cooling. Our forecast calls for activity to continue to slow through the remainder of 2023. This should help ease inflation pressures, enabling the Fed to keep the funds rate at 5.25% for the rest of the year.
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 April 14th, 2023
Financial News Highlights
- Headline inflation rose 0.1% m/m in March, while core rose by a strong 0.4% m/m. The 12-month change on headline slipped to a near two-year low of 5%, while core ticked higher to a still uncomfortable 5.6%.
- Retail sales (-1.0% m/m) slipped again in March, falling for a second consecutive month after an unusually strong start to the year. Declines were seen across most categories, leaving a weak handoff heading into Q2.
- Though there are tentative signs the economy is cooling, the Federal Reserve likely has one more 25 basis-point rate hike to follow through on in May, before pausing to better assess the full impact of rate hikes.
Calm Prevails As Economy Shows Tentative Signs of Cooling
Rounding the corner into earnings season, a sense of calm seemed to descend across financial markets this week in financial news. But with earnings season not officially in full swing until Friday morning, investor focus fell squarely on the economic data. The two headliners this week were the March readings of CPI inflation and retail sales, though the release of the FOMC meeting minutes also garnered some attention.
The latest move by the Federal Reserve occurred during the recent regional banking crisis, which ultimately forced the FOMC to rethink its trajectory for the federal funds rate. The uncertainty was on full display in the minutes, where several participants thought it was appropriate to hold the target range steady last month in light of recent events. This was an abrupt U-turn from what policymakers had communicated just a few weeks prior to the interest rate announcement, where the thought was rates needed to move both higher and faster relative to what had been assumed in the December’s Summary of Economic Projections. But perhaps the most noteworthy takeaway from the minutes was an explicit mention that considering the recent banking crisis “… the staff’s projection included a mild recession starting later this year, with a recovery over the subsequent two years”. Indeed, participants agreed that the actions taken by the Federal Reserve and other government agencies helped calm conditions in the banking sector but deemed that it was still too early to assess the confidence and magnitude of the effect of credit tightening on the real economy.
This morning’s retail sales gave a first glimpse into the impact that tighter credit conditions may already be having on households. Both nominal and real spending fell 1.0% m/m in March, marking the second consecutive month of declines. But even after accounting for the pullback, consumer spending is still tracking a robust 4.2% for Q1 in financial news. However, the weak handoff from March suggests last quarter may have been the “last hurrah” as the cumulative effect of higher interest rates alongside the recent tightening in lending standards appear to be bearing down on the consumer.
From an inflation standpoint, the softening in demand has yet to manifest in any significant easing in core consumer price pressures. Indeed, headline inflation slipped to 5% y/y – a near two-year low – thanks to lower food and energy prices (Chart 1). However, core CPI rose 0.4% m/m, leaving the 3-month (annualized) and 12-month rates of change at 5.1% and 5.6%, respectively. Underpinning the gains was an acceleration in goods prices alongside continued strength in shelter (0.6% m/m) and non-housing services (0.3% m/m).
For a central bank who has become increasingly data dependent, the continued persistence in core inflation alongside the recent uptick in inflation expectations is unlikely to sit well (Chart 2). Provided there are no further flare-ups in financial markets, it is likely that the FOMC will need to raise the benchmark rate by another 25-bps in May, before pausing to better assess the full impact of the 500-bps of 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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Featured Article: 5 Best Places to Stay in U.S. National Parks
5 Best Places to Stay in U.S. National Parks
America’s national parks offer some of the best places to immerse yourself in nature, with stunning coastal and mountain landscapes that provide the ultimate spot for outdoor adventure. While most national parks offer campgrounds, a select few have hotels or lodges right within their boundaries. If roughing it isn’t something you relish, you’ll want to consider one of these properties, from the protected Alaska wilderness to the exotic shores of Hawaii.
Old Faithful Inn – Yellowstone National Park, Wyoming
A national historic landmark, the Old Faithful Inn opened in Yellowstone National Park in 1904, with the radiators and electricity fueled by a steam generator. It’s been the most popular place to stay in the park ever since, offering a warm, rustic feel, while still being spectacularly grand. The lobby is particularly impressive with its nearly 80-foot-high ceiling and huge stone fireplace. Rooms line the exterior of the seven-story log building, and each level has a balcony that overlooks the lobby. Some also boast breathtaking views of Old Faithful and the other geysers nearby. They don’t include TVs or Wi-Fi, so this is a perfect opportunity to forget about those electronic devices and just enjoy all that the inn and the park have to offer.
Open only from early May through early October, the inn is the most popular accommodation option in the park, so you’ll want to book your stay well in advance.
Glacier Bay Lodge – Glacier Bay National Park, Alaska
Glacier Bay Lodge is the only non-camping option for accommodation in Glacier Bay National Park. Open from around Memorial Day Weekend to Labor Day Weekend, it can only be reached by boat or plane. Most visitors take the 35-minute flight from Juneau followed by the lodge shuttle. The effort is worth the reward as you’ll be surrounded by snow-capped mountains, glistening turquoise water, and a wealth of wildlife. The highlight of a stay here is the catamaran tour operated by the lodge that will bring you to the park’s famous glaciers. Along the way, watch for the bald eagles and puffins that soar through the sky; mountain goats, coastal brown bears, and moose that roam the land; and sea lions, sea otters, porpoises, and whales that swim through the water.
The lodge guest rooms are tucked among the spruce trees at Bartlett Cove and include options for bay views. You won't have access to TVs or Wi-Fi in your room, but you can connect in the lobby, which features a stone fireplace, and a restaurant with floor-to-ceiling windows for dining or unwinding with a magnificent view of the bay.
Lake Quinault Lodge – Olympic National Park, Washington
Located at the edge of Lake Quinault in the western region of lush Olympic National Park, historic Lake Quinault Lodge provides the perfect base for exploring the rainforest and enjoying activities on the lake, with paddleboards, kayaks, and canoes available for rent. Plus, the coast is less than 30 miles away if you want to enjoy the park’s wild stretches of driftwood-strewn beach that’s thrashed by powerful waves. The lodge offers guided boat tours and tours through the rainforest where you’ll watch for black bears while learning about Quinault Indian Nation history.
A variety of lodge rooms are available year-round, including Fireplace Rooms with gas fireplaces and private lake and forest views. All come with TVs and Wi-Fi, while common amenities include an indoor pool, sauna, game rooms, and an outstanding restaurant.
The Ahwahnee – Yosemite National Park, California
Open every season, The Ahwahnee is an iconic property in one of the most breathtaking national parks in the country, Yosemite. Nestled among the park’s famous dramatic cliffs with sheer granite faces and enchanting waterfalls in Yosemite Valley, it’s hosted everyone from photographer Ansel Adams to Presidents Kennedy and Obama since opening its doors nearly a century ago. Guests are steps from scenic trails that lead to the park's famous peaks and cascades. Those who prefer to hang around the hotel will enjoy awe-inspiring views from the grounds and through the massive lodge windows of Yosemite Falls, Glacier Point, and Half Dome.
There are two dozen cottages and 97 rooms in the main lodge, ranging from standard to presidential, including the Mary Curry Tresidder Suite where Queen Elizabeth II once slept. While the interior elegantly blends Native American and art deco influences, you’ll have modern amenities, including a flat-screen TV and Wi-Fi.
Volcano House – Hawaii Volcanoes National Park, Hawaii
Those who are fascinated by volcanoes shouldn’t miss the opportunity to stay at Volcano House. Located inside Hawaii Volcanoes National Park, it offers one of the most stunning views you’ll find in any national park lodge. From the main floor, you’ll be able to watch the fiery glow through the massive windows. The park protects Kilauea volcano, one of the world’s most active, producing some 250,000 to 650,000 cubic yards of lava daily – that’s enough to resurface a two-lane, 20-mile stretch of roadway every day.
Guests who stay at Volcano House will be just a skip and a jump from hiking trails that wind around the edge of the caldera and there are daily guided walking tours available as well. Many of the guest rooms come with volcano views, some have lanais, and all come with Wi-Fi. Dining with a backdrop of the caldera and the crater can be enjoyed at The Rim at Volcano House, which offers an impressive menu of grass-fed beef and fresh-caught fish.
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Financial News for the Week of March 31st, 2023
Financial News Highlights
- FOMC voting members noted the interest rate path will depend on incoming data and highlighted the uncertainty surrounding the effects of regional bank stress on credit availability.
- Inflation remained relatively elevated, despite moderating last month, as total and core PCE inflation both rose 0.3% month-on-month (m/m) in February.
- Pending home sales in February surpassed expectations by a notable margin as modest price declines and lower mortgage rates supported activity at the start of the year.
Quiet End to a Volatile Quarter
The last week of the first quarter was relatively quiet as markets continued to digest last week’s Federal Reserve decision and the potential implications of regional bank stress on credit conditions in financial news. In terms of economic data, we received updates on housing, consumption, and inflation. Equity markets drifted higher on the week, with the S&P 500 up 2.5%, while the 2-year Treasury yield rose by roughly 30 basis-points (bps) to sit at 4.1% as of the time of writing – still about 90bps below its cyclical peak of 5% at the start of the month.
Starting off on Sunday, we heard from Minneapolis Fed President Neel Kashkari. Reiterating Chair Powell’s statements from last week, Kashkari noted that the banking system is resilient, but that uncertainty remained regarding the extent to which stress in the banking sector may lead to a credit crunch in financial news. For this reason, Kashkari assessed that “it’s too soon to make any forecasts about the next interest rate meeting [in May]”. This marks a notable deviation from his comments on March 1st that he was open to a 50bps hike in March. The uncertainty is also reflected in the market’s sentiment about the Fed’s May decision – now pricing the odds of a hike at basically a coin toss.
Housing data surprised to the upside this week, with pending home sales rising by 0.8% month-on-month (m/m) in February, down from the 1.8% rise seen in January, but well above the consensus expectation of a 3% m/m decline. This relative strength was likely front-loaded in the month, as mortgage rates rose by roughly 50bps in February. Pending home sales tend to lead final sales by 1-2 months, so this could be an indicator that the spring housing market may begin with some strength, particularly considering that mortgage rates have fallen by roughly 30bps since March 10th (Chart 1). However, stretched affordability and still relatively high financing costs are expected to remain notable headwinds moving forward.
The pulse check on the American consumer this week showed that personal income grew by 0.3% m/m in February, decelerating from January’s gain of 0.6%. This helped to push personal spending up by 0.2% m/m, with housing and health care services seeing the largest increases. Total and core PCE inflation both rose by 0.3% m/m, decelerating relative to January but remaining elevated (Chart 2). More recent data showed that consumer confidence rose in March on a modestly improved outlook for six months ahead, whereas the consumer assessment of the current economic situation deteriorated. The survey cut-off was 10 days after SVB failed, so it is likely that this reading only partially captures the consumer response to recent banking sector stress.
Looking ahead to next week, markets will be closely watching the March employment data release on Friday, with consensus expectations for job growth to cool and the unemployment rate to remain unchanged. This will be one of the more important updates between now and the May Fed meeting, as policymakers continue to look for signs of labor market cooling and its subsequent easing effect on price growth.
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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