Financial News for the Week of March 24th, 2023
Financial News Highlights
- The Federal Reserve delivered a modest 25-basis point hike this week amid banking stress, lifting the policy rate to a range of 4.75-5.00% – a level that’s just a hair below its previous peak back in 2007.
- Fed projections show the policy rate peaking at 5.1% in 2023, implying one more hike for the year, while next year a series of cuts are forecast to bring the rate down to 4.3%. Market expectations, however, are titled toward a lower rate environment in both years.
- Existing home sales rose 14.5% in February, recording the first increase after twelve consecutive months of declines.
Fed Delivers Small Hike Amid Banking Stress
Stuck between a rock and a hard place, the Fed appears to have taken a middle-of-the-road approach in setting monetary policy this week in financial news. Inflation, which remains well above target and has shown moderate signs of acceleration recently coupled with strong job growth, meant that the Fed could have opted for a more hawkish stance at Wednesday’s FOMC meeting. Fed Chair Powell nodded to this possibility in his testimony to Congress two weeks ago. However, the ongoing banking turmoil has upended this narrative. Instead of leaving the rate unchanged, – an option that was closely considered – Fed officials ultimately went with a 25-basis point hike, lifting the policy rate to 4.75-to-5.00%.
In taking this decision, the Fed acknowledged the risks from the banking turmoil, including the potential negative impact on the real economy from tighter credit conditions for households and businesses in financial news. Tighter credit conditions could do some of the Fed’s work for it in reducing inflationary pressures, substituting for further hikes. However, as Chair Powell noted in the press conference, it’s not clear how significant and how sustained the credit tightening will be. The Fed is keeping the door open to some further monetary tightening for now, but changes in the language of the FOMC statement suggest that it is very close to wrapping up its hiking cycle.
Along with the policy decision, the Fed also issued an update to its quarterly economic projections. Fed officials now expect inflation to remain slightly higher by the end of 2023 and 2024 compared to their view in December. Meanwhile, economic growth is expected to come in a bit softer over this same period, with a downgrade to the 2024 growth profile the most noticeable difference (Chart 1).
Policy rate expectations remained unchanged for 2023, with most Fed officials expecting the rate to peak to 5.1%, which implies one more hike this year. Market expectations, however, are not in tune with this view. The current pricing suggests that the Fed is done hiking rates, and that rate “cuts” will follow suit shortly this summer. Moving on to next year, while Fed officials have penciled in a series of rates cuts that will bring the policy rate down to 4.3%, market expectations remain more dovish, with the gap between the two forecasts widening (Chart 2). Our projection is aligned more closely with the Fed this year, but as growth slows into next year, we anticipate that in 2024 the Fed will loosen monetary policy more than it projects to steady the economic ship.
Reiterating Chair Powell’s view, the degree of credit tightening from the recent banking turmoil remains a major source of uncertainty for the outlook. On this front, it appears that authorities will need to stay alert in putting out more fires. Across the Atlantic, after finding a solution to the Credit Suisse troubles, the attention has now turned to another Global Systemically Important Bank (G-SIB), Deutsche Bank, after a surge this week in the cost of insuring the lender’s debt against default. With banking developments front and center, economic data played second fiddle, but a strong housing report (see here) did bring some cheer.
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 March 17th, 2023
Financial News Highlights
- Following the collapse of SVB and Signature Bank, policymakers were quick to put together a rescue package over the weekend to allay depositor fears and reassure financial markets.
- Despite recent market jitters, economic data out this week including CPI, retail sales, and housing starts all suggest more tightening is still required to cool demand and return price stability.
- A classic run on banks rippled through the financial system, but the regional banks’ equity underperformance reflects the idiosyncratic nature of this episode.
- Risk sentiment tightens financial conditions and feeds through to the real economy if it remains unresolved for a period of time. At this early juncture, it may not deter the Fed from raising interest rates on March 22nd, but can certainly put the May meeting on ice if pressures persist.
Lifelines Extended, But Uncertainty Remains
In financial news, can policymaker’s walk while chewing gum? We’ll soon find out. The Federal Reserve’s attempt at reining in multidecade inflation without causing a recession was always thought to be a lofty goal. However, last week’s failure of both SVB and Signature Bank followed by the subsequent deposit run at First Republic has added a new layer of complexity.
In an effort to allay depositor fears and reassure financial markets, the FDIC, Federal Reserve, and U.S. Treasury implemented a rescue plan over the weekend. Deposit insurance for all deposits over $250k was extended, while a Bank Term Funding Program was also established, allowing all depository institutions to borrow at the Fed at a low rate using standard collateral. Moreover, the collateral could be valued at par rather than “marked to market” as is the case with other Fed liquidity facilities. Not only will this increase the amount of capital that troubled banks can access, but it will also prevent institutions from having to sell assets at significant losses, which should help to shore up confidence and stem the tide on further deposit outflows in financial news.
While sound in theory, investors remained skeptical that the risk remained contained to just a handful of regional banks. And this skepticism was only reinforced when news came that Credit Suisse may also be experiencing similar liquidity issues. Market sentiment soured mid-week but was quick to recover following news that First Republic had secured a rescue package and that the Swiss Central Bank would provide a liquidity backstop for Credit Suisse. After a volatile week, the S&P 500 finished 2% higher, while the 10-year yield fell 25bps landing at 3.45%. Investors also significantly recalibrated expectations on the future path of the fed funds rate, with a 25bps hike at next week’s announcement only 75% priced and rate cuts again priced for later this year (Chart 1).
Only time will tell if this sharp repricing is overdone, but at the moment, the Fed appears stuck between a rock and a hard place. It is clear that the rapid adjustment in interest rates over the past year has pinched a nerve within a sub-segment of the banking sector. But on the other hand, the recent flow of economic data suggests more tightening is still required to cool the economy and return price stability. This was evident in February’s reading of CPI, where core inflation accelerated on the month – rising by 0.5% m/m – pushing the 3-month annualized change to a four-month high of 5.2%. Considerable breadth was seen across the cyclical component of services, which is closely tied to discretionary spending. And while goods prices were flat on the month, that was largely due to another sizeable decline in used vehicle prices, offsetting an acceleration across most other goods categories (Chart 2). Outside of inflation, retail sales (-0.4% m/m) softened in February but that was only after an outsized gain in January, while housing starts ended a 5-month slide and surged 10% m/m to 1.45M. The data is definitely telling the FOMC to hike, but the financial stability concerns also cannot be ignored. Provided risks remain contained, we expect the Fed to push ahead with another 25bps hike next week.
Thomas Feltmate, Director & Senior Economist | 416-944-5730
Financial – Some Banks Fail, but It's Not a Free Fall
The Federal Reserve was blind sighted by an evolving risk that was right under its nose. While it tightened monetary policy at an unprecedented pace, deposit growth within commercial banks plummeted at an historic pace (Chart 1) in further financial news. Some of this movement reflected the outcome of quantitative tightening and some reflected a shift in depositor preferences into higher yielding products. Predicting this shift was actually well within forecast models, offering little element of surprise. Predicting individual behaviors and market confidence, however, is another story.
Unless you've been completely cut off from every form of communication, by now it's well known that the sudden failure of Silicon Valley Bank was more than a classic "run on a bank". The aggressive rate hike cycle pressured the market value of the bank's financial assets, even though these were deemed high quality and liquid. Meanwhile, a concentration of a large amount of uninsured deposits from start-ups and cryptocurrency companies left the bank exposed to a sudden shift in confidence. Once the financial market participants witnessed a mass deposit exit and a swift bank failure, it opened the door to lurking risks within other institutions. The fear of the known unknown kicked in.
However, that fear has largely been contained, at least at this juncture. The pressure on equity markets was not economy wide. A concentration within the banking sector was further narrowed to the regional banks' sub-sector. In the period between March 8th and March 15th, the S&P's Regional Banks Sub-Industry Index lost more than 30% of its value while the S&P 500 index declined by 2.5%, half of which was due to the pressure on the banking sector (Chart 2). While large, the magnitude of change is not unprecedented. During the Global Financial Crisis – the poster child of the banking sector crisis – the index lost almost 80% of its value (albeit, in a period of six months), while its maximum daily loss was 1.5 times greater than the current episode.
The relative containment of the crisis doesn’t negate the seriousness of the situation. Look no further than within expectations for the fed funds rate. In a matter of ten days, the futures market turned upside down, shifting its pricing from a 50-basis point hike in March and a 5.75% terminal rate, to 25-basis point hike and a terminal rate 85 basis points lower. On March 13th, the two-year yield collapsed by 57 basis points to 4.03% – the largest decline since the Black Monday market crash of 1987. This initially pushed the U.S. dollar down 2% relative to other currencies. But, the greenback reclaimed its strength as a safe-haven currency as soon as the confidence shock drifted over the Atlantic. As the biggest shareholder of Credit Suisse declared no interest in upping its funding commitment to the already-beleaguered institution, the greenback finished 1.5% below March 8th level.
In both cases, the respective regulators and the central bank stepped in to provide a liquidity backstop, having learned from the past that the first order of business is to stabilize financial market shocks that have the potential to seize up the system if left unchecked in financial news. The second order of business will be to ensure guard rails are in place to limit a future episode. This usually comes in the form of more oversight. Market chatter has already settled on one possible change for U.S. mid-and-small sized banks to lower the banks' asset threshold at which stricter capital and liquidity rules start to apply from $250 to $100 billion. Another proposal being bantered about is to put more rigor into the stress test that assesses valuation of banks capital during a hypothetical macroeconomic recession scenario.
From an economic perspective, any permanency in tighter financial conditions among mid- and smaller-sized banks that flows through to tighter credit standards will impact loan demand and the real economy. The irony is that this feedback loop might help the Fed tap down domestic demand and contain inflationary pressures, as long as pressure on financial conditions remain 'controlled'. Up until now, the U.S. economy was described as stronger-for-longer, with consumers and job demand completely defying the odds. Time will tell.
Maria Solovieva, CFA, Economist | 416-380-1195
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 March 10th, 2023
Financial News Highlights
- Chair Powell’s testimony threw the market in to risk-off mode with both the Treasury and equity market falling on the week.
- The economy added 311k jobs in February, well ahead of the consensus forecast of 225k, reinforcing the resilience of the job market.
- There’s still plenty of data to come in before the Fed’s rate decision, with next week’s inflation report the most important.
Jobs Market Stays Strong
Chair Powell’s bi-annual testimony to Congress pushed the market into risk-off mode as his explicit remarks put the half-point rate hike back on the table in major financial news. In his statement, Powell highlighted the strength of the latest economic data, “which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”.
Treasuries plunged to fresh lows, with the two-year yield moving briefly above 5% for the first time since July 2007, while keeping the ten-year yield hovering just below 4%. As a result, the spread between the two (one of the strongest market-based recession indicators) widened to the 100-basis point mark before narrowing back to 90 bps by the end of the week (Chart 1) in financial news. This is the deepest inversion since 1981. The equity market was as volatile, with the trouble at SVB Financial Group adding to shock. The S&P 500 Index moved below the 4,000-level finishing the week with a 3.4% loss (at the time of writing).
Today’s payrolls report didn’t help settle the markets. The employment number came in stronger than anticipated (at 311k v. 225k expected), suggesting that there is considerable strength in the jobs market. The unemployment rate returned to 3.6% as the labor force expanded, lifting the participation rate to 62.5%. Notably, the monthly increase in the goods producing sector was the smallest since May 2021, with job gains tilted towards the services sector (Chart 2). The trend pace of average hourly earnings growth over the past three months slipped to the slowest pace of growth in nearly two-years. However, hourly earnings don’t adjust for compositional effects across sectors, and have been running well below other metrics in recent months. February’s softness is likely in part due to job gains concentrated in lower-wage sectors and jobs losses in some higher-wage ones.
The tight labor market was also evidenced in January’s Job Openings and Labor Turnover Survey (JOLTS). While job vacancies declined to 10.8 from an upwardly revised 11.2 million in December, they remain high, suggesting that demand for workers exceeds supply – a condition that will continue to support wage growth.
There’s still plenty of data to come before the Fed’s March 21-22 meeting, when the Fed decides on the rate hike and releases updated economic projections. Next week, we’ll have more details on CPI and retail sales for February. The former has more bearing on the rate decision, as it makes up the second half of the Fed’s dual mandate (besides maximum employment), while the latter may contribute to the Fed’s understanding of consumer spending momentum. To convince FOMC members to keep the same pace of rate hikes as in December, price changes would need to provide evidence of a decelerating trend. Today, the probability of a 50-basis points hike settled around 40% - higher than 28% last week but lower than more than 70% earlier this week.
Maria Solovieva, CFA, Economist | 416-380-1195
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 March 3rd, 2023
Financial News Highlights
- Pending home sales rose 8.1% in January, however with mortgage rates now back up around 7% this is unlikely to be sustained moving forward.
- The ISM Manufacturing Index improved for the first time in six months but continued to indicate contraction in the sector.
- Fed speakers this week noted the upside risk to the policy rate path posed by recent economic data, pushing the 10-year Treasury yield above 4%.
Higher Rates Abound
Congratulations on successfully making it to the third month of 2023. We are now just two and a half weeks away from economists’ most anticipated day of 2023. No, not the first day of Spring, the next FOMC rate announcement on March 22nd. This week we got a peek into six different FOMC members thinking on the expected path of policy and got pulse checks on the housing, manufacturing, and service sectors. In financial markets, Treasury yields continued their upward march, with the ten-year Treasury yield rising above 4% while the S&P 500 has clawed back earlier losses and is up 1% on the week as of the time of writing.
Pending home sales in January increased for the second consecutive month, rising by 8.1% month-on-month (m/m). Falling mortgage rates in late 2022 helped slow the year-long decline in sales activity, despite prices continuing to sink through the end of the year. Seasonally adjusted national home prices, as measured by the S&P CoreLogic Case-Shiller index, continued to decline in December (-0.3% m/m), matching the decline seen in November. With the 30-year mortgage rate rising to 7% in February this reprieve is likely to prove temporary (Chart 1).
On Wednesday, the ISM Manufacturing Index improved for the first time since August, though the sector remained in contractionary territory for the fourth consecutive month (Chart 2). New orders and backlogged orders continued to contract, albeit at a slower pace. In contrast, the ISM Services Index reading on Friday showed that the industry is still expanding, with new orders growing at a faster pace.
Supplier delivery times continued to see improvement in both sectors with ocean freight costs declining for a sixth consecutive month. However, the manufacturing prices paid subindex increased for the first time since September, reflecting higher raw material prices. Although the subindex remained below the historical level associated with an uptick in the Producer’s Price Index, Treasury yields rose in response to the possible implications this could have on inflation and the Federal Reserve’s policy path.
Speaking of the Fed, we heard from seven different Federal Reserve officials this week, six of whom are current voting FOMC members. Their talking points covered a range of topics, from Governor Jefferson pushing back against calls for the Fed to raise its inflation target to Chicago Fed President Goolsbee saying it would be a mistake for the Fed to rely too heavily on financial market reactions. We also received policy specific comments, with Minneapolis Fed President Kashkari noting that he is open to a 50 basis point hike at the next meeting and Atlanta Fed President Bostic (a 2024 FOMC member) saying in an essay that he sees the policy rate going to 5.00 - 5.25% and staying there well into 2024.
Members made it clear that they are not yet convinced of the downward trajectory in inflation and upside risks to the policy rate path remain. All eyes will be on next week’s February employment data, which will show whether January’s blowout job growth was just a blip or something more concerning altogether for the Fed.
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 February 24th, 2023
Financial News Highlights
- A second read on fourth-quarter GDP showed that the U.S. economy grew by 2.7% (q/q annualized) instead of 2.9%
as reported previously. A measure of underlying domestic demand was revised down from 0.2% to an even softer 0.1%. - Real consumer spending rose a solid 1.1% month-on-month (m/m) in January. Core PCE inflation came in hotter than
anticipated, rising to 4.7% year-on-year in January from an upwardly revised 4.6% in December. - Despite hopes for an improvement to the housing narrative at the start of 2023, existing home sales fell 0.7% (m/m) in
January, extending their losing streak to 12 consecutive months.
Sticky Inflation Means Higher Rates
Not all economic data was positive this week, but a strong rebound in consumption and evidence of sticky inflation continued to build the case that the Fed will take the policy rate higher in financial news. Rising Treasury yields took a toll on equity markets, with the S&P 500 down 3.3% from last week’s close (at time of writing).
A second reading on fourth-quarter GDP showed that the U.S. economy ended 2022 on softer footing than previously reported. The headline measure was revised down from 2.9% quarter-on-quarter (q/q) annualized to 2.7%. Net exports and inventory investment, two inherently volatile components, continued to make up the bulk of gain, while final sales to private domestic purchasers – a measure of underlying domestic demand – was downgraded from 0.2% to an even softer 0.1%. This as consumer spending was shaved down noticeably from 2.1% to 1.4%.
However, January’s personal income and outlays report showed that consumer spending rebounded strongly to start the year. Real consumer spending rose 1.1% month-on-month (m/m) in January, reflecting gains in both goods and services. Following in the footsteps of a strong retail sales report, real goods spending rose a sharp 2.2% (m/m), while services spending rose 0.6%. Overall, this is a very good start to first-quarter consumption, which we anticipate will expand in the 1.5-2.0% (q/q annualized) range in financial news. A tight labor market, which is helping support healthy growth in wages and salaries, will also help in this regard.
The above report also provided an update on inflation. Total PCE inflation accelerated to 5.4% year-on-year (y/y) from 5.0% in December. The Fed’s preferred inflation gauge, core PCE, accelerated modestly, rising to 4.7% y/y from an upwardly revised 4.6% in December. The key point to highlight here is that core PCE inflation looks to have picked up some steam recently (Chart 1).
The fact that inflation is showing signs of stickiness and that the labor market remains hot, raises the odds that the Fed will need to take the policy rate higher and perhaps keep it there for longer. Minutes from the latest FOMC meeting, which showed members’ resolve to keep fighting inflation through additional rate hikes based on incoming data, helps further cement this view. Marked odds still favor a rate hike of 25 basis points (bps) at the March meeting, but odds for a 50-bps hike crept higher following the PCE report and are hovering around 33% as of writing.
Among other things, a “higher for longer” policy rate, means that there could be additional fallout for interest-sensitive areas of the economy. On this front, existing home sales fell again in January (-0.7% m/m), extending the losing streak to 12 consecutive months. Since interest rate changes tend to influence sales activity with a lag, past declines in mortgage rates could drive some improvement in sales over the near-term. But given that mortgage rates turned higher again, housing activity will continue to be tested. High frequency data second this view, with mortgage purchase applications falling to a 28-year low last week (Chart 2). Indeed, it appears that the start of a new and improving trend in housing is still some time away.
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 February 17th, 2023
Financial News Highlights
- The week’s data reminded markets that inflation is far away from the Fed’s target. Both headline and core CPI came in on par with expectations, but details suggest that disinflationary forces are softening.
- Retail sales rebounded from the year-end weakness. The biggest gains were picked up by auto dealers, but other categories were strong beyond expectations.
- More evidence of economic resilience means the Fed may need to fight harder to keep inflation under control. The probability of a 50-basis point hike in March rose from 9% to 21% on the week.
Higher for Longer
“Resilient” is the epithet that describes this week’s economic data the best in financial news. Retail sales came in a full percentage point stronger than expected, while inflation figures point to a slower descent than expected. The reaction of the equity market was mixed: stock prices dipped after the initial releases but then bounced back, losing less than 1% on the week. Bond markets, on the other hand, continued to price in higher rates, with 2-year and 10-year yields rising by 18 and 22 basis points on the week (at the time of writing).
The source of this divergence is interpretation. The Consumer Prices Index (CPI) came in on par with expectations for both the headline and core (ex. food & energy) measures, which gained 0.4% and 0.5% on the month, respectively. Relative to last year, the pace of growth slowed to 6.4% for headline CPI and to 5.6% for core CPI in financial news. However, there were few convincing signs of weakness in core services inflation, even when excluding the shelter component – the most important metric for the monetary policy outlook, according to Chair Powell (Chart 1). This is at the time when the disinflationary contribution from core goods inflation appears to have taken a break, especially if the car prices turn higher next month (as signaled by the Manheim price index for used vehicles).
More inflationary pressure was also reported in the Producer Price Index (PPI), which surprised to the upside in January. The headline measure rose 0.7% month-on-month (m/m), while core inflation gained 0.5% m/m. A change in the PPI doesn’t always result in parallel changes in the CPI, but its volatile dynamic proves that the path to disinflation is not a straight line.
In the context this week’s retail sales report, however, persistent inflation seems less surprising. A warmer January helped heat up consumers’ aptitude to spend. The biggest gains were picked up by auto dealers, primed by the remaining pent-up demand and improved supply as production continues to recover. Predictably, nicer weather made dining out more pleasant, making restaurants the second largest contributor to growth last month. But other categories (department stores, e-commerce, and furniture & electronics stores to name a few) were also robust beyond expectations. This suggests that demand remains resilient: our estimate of real sales was up 2.8% on the month, turning the three-months trend positive (Chart 2).
What didn’t respond to warm weather is housing starts, which fell by 4.5% m/m in January, coming in below the consensus forecast. Both single- and multi-family segments were softer, but while the former remains below its pre-pandemic average, the latter remains 27% stronger relative to 2018-19. Still, housing construction is the only measure that held a course towards disinflation this week. The rest of the economic data makes a “compelling economic case” to bring rates higher and keep them there for longer. As a result, the probability of a 50-basis point hike in March rose from 9% to 21% on the week, while bets on fewer rate cuts by the end of the year jumped higher. We now expect the Fed will raise the policy rate to 5.25% and keep it there until the fourth quarter of 2023 (see D&S).
Maria Solovieva, CFA, Economist | 416-380-1195
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: Dream Retirements Reconsidered
Dream Retirements Reconsidered
When deciding on the ideal place for retirement, a little homework can spare you a lot of headaches.
When it comes to retirement, people often get caught up in the illusion, rather than the reality of retirement living. Before making a commitment to move, understand this change is a fine mix of dreams, practicalities and your vision.
You can find your perfect mix when you consider all the factors, beyond the weather, amenities and proximity to friends.
With an ocean of options, how do you decide? Consider your vision and your wants and needs, because none of the "Best Places to Retire" lists can consider your personal likes and dislikes. Also, there are practical and financial considerations to recognize.
Here are three dreams that disappointed many newly minted retirees:
1. Live Near Your Children
You finally have time for family time in retirement. You want to be available to your children and more engaged in their lives. Best of all, if you are lucky enough to have grandchildren, you desire to get to know them better, even teaching them things your grandparents taught you.
There are some valuable conversations you need to have with your children before you put up that "For Sale" sign and look for a place nearby. As your children are working with full schedules, plan time for a serious chat. This important conversation is so you can understand their life a bit more and learn what works for them.
Ask yourself if you like the area enough that you would move there if your child was not there.
Some conversation starters are: How does your child and their family fit you into their life? Do they want you around more often? Are they worried about the time and energy of being with you? Or caring for you eventually? You may be healthy now, but such an issue may be on their mind.
Then, ask yourself if you like the area enough that you would move there if your child was not there. Is the community a good fit? The weather? The available activities?
If you do make the move, remember that your adult children had a routine and schedule before you got there. When you arrive, create a life without them as much as with them. Retirees who settle in and focus only on family often feel lost 10 years down the road when the toddler grandchildren who they saw everyday grow into teenagers who prefer to be with friends. If they end up moving away for college, you will see them even less.
Prepare for change, just in case. A job transfer, career change, corporate merger or any number of other life-disrupting events may lead your child's family to relocate in coming years. Would you feel you had no option but to follow them again? Or could you stay put because you had built a community that would let you confidently live on your own?
A couple bought a condominium in Arizona in anticipation of their retirement one year out and enjoyed the vacation time they spent with their children and grandchildren before they retired. Three months after they retired and moved, their son-in-law's company transferred him to California. The couple was left alone and reflecting on the possible need for another move.
2. Move to a Favorite Vacation Area
Vacations are freedom from everyday life. It's easy to dream of retiring in your favorite vacation spot. Before committing to a location, stay longer than usual. Rent a home for a month, a season or a year. Explore the area as a local.
Do not forget seasons. Spend a winter at the lake or a summer at the ski resort before committing to buy.
Just because you like to vacation somewhere does not mean it is the ideal retirement home location.
Just because you like to vacation somewhere does not mean it is the ideal retirement home location. Many people move twice because they thought they knew what they wanted. And moving is expensive. The average moving company bill for a 1,200-mile move is $4,000.
One couple made a quick decision to sell their home without thinking it through. As soon as the sale went through, they went to Florida and bought a condominium in an area where they spent their annual vacation.
They discovered they bought in a rental area, not a residential area, so making friends was difficult and some services limited. A year later, they moved to another area, incurring moving costs and Realtor fees again.
Emotional and personal reasons for moving are important, but so are costs such as taxes. If you change residency to a new state, consider the cost of new car registrations and legal fees for an updated estate plan. Explore the true costs of the area you want to move to, so you avoid surprises.
3. Head for the Border and Skip the Country in Retirement
The grass always looks greener when thinking of where to retire... and that applies whether you are considering Canada, Mexico, Europe or beyond. In the excitement to retire, many people only consider the big picture of what looks good rather than practicalities of an international move.
If you are moving for cultural immersion, understand many of the places that attract you also draw other Americans. The good news: you can associate with people who share your experience. But by sticking together, you are less likely to be treated as a local than foreigners who assimilate.
There is the legal side of residency. Understanding how you can live in a country long-term is essential, so check out the visa process. A country may or may not make it easy for U.S. citizens to immigrate. For example, Canada recently forbid foreign nationals to buy property for two years.
"The tax situation may be higher than anticipated, offsetting the lower cost of living."
The cost of living is one reasonable draw to live outside the United States, yet there are other financial considerations. "Retirement income will be 100% taxable by the U.S. and perhaps additionally in the country you move to," says Malissa Marshall, a Certified Financial Planner in Bristol, Vermont.
"The tax situation may be higher than anticipated, offsetting the lower cost of living," she emphasizes.
You may want to hire a tax professional in the country you are considering and one in the U.S. before finalizing any plans. An international expert can explain the reality in a short time.
Consider Health Care Abroad
Then, there is the issue of health care and insurance, especially if you do not pay for the Medicare premiums while you live abroad. If you ever return to the U.S., your Medicare insurance premiums will be permanently higher. Medicare charges a premium penalty for the months you did not pay but were qualified, even if you were covered overseas.
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Financial News for the Week of February 9th, 2023
Financial News Highlights
- Since last Friday’s blockbuster employment report, market pricing on the peak fed funds rate has firmed to 5.25%. This aligns to the FOMC’s December projections, though markets still foresee the Fed cutting rates later this year.
- At an event on Tuesday, Fed Chair Powell did not pushback against investors’ diverging view, nor was his tone any more hawkish, despite last week’s strong reading on employment.
- With the FOMC now in the “fine turning” stage of the tightening cycle, policymakers have become increasingly data dependent. This means next week’s inflation report will be under the microscope.
Holding the Line… For Now
It was a very quiet week on the economic data calendar, giving investors a bit more time to digest last week’s blockbuster employment numbers in financial news. Since the jobs report, market pricing on the future path of the fed funds rate has firmed, with investors now anticipating two more 25 basis-point hikes by May, bringing the terminal rate to 5.25%. This aligns to FOMC’s last forecast outlined in the December Summary of Economic Projections. In contrast, markets differ from the Fed on the timing of rate cuts, with interest rate cuts priced in by financial markets for later this year, whereas the Fed doesn’t foresee that happening until 2024.
At an event on Tuesday, Fed Chair Powell did not pushback against the markets’ diverging view. Instead, he reiterated many of the same themes that he had emphasized in the press conference following last week’s interest rate announcement. The key message being that while the disinflationary process has begun, it remains very much in the early stages, and it will take “considerable time” before inflation returns to 2%. While financial markets initially rallied on the remarks, they later sold-off through the back-half of the week. At the time of writing, the S&P 500 is down 2%, while the 10-year Treasury edged higher by 15bps to 3.7% for the week.
When asked specifically about last week’s employment numbers, Powell said that it, “simply reaffirmed that the central bank has some way to go on raising rates” and that the strong numbers highlight that the adjustment process is unlikely to be linear. While there’s certainly validity to that argument, there’s also reason to believe that the January payrolls may be overstating the degree of strength in the labor market.
For starters, January was unseasonably warm across most of the U.S., which likely means there was a pull forward of economic activity. From that perspective, some of January’s gains may have been robbed from subsequent months – suggesting much weaker employment growth in the months ahead. Second, seasonal adjustment factors may have also played some role in biasing last month’s numbers higher. January is historically a month where non-seasonally adjusted payrolls record a massive decline in absolute terms (Chart 1). While this remained true last month, it did so by the smallest amount since 1995. This likely translated to an outsized gain in the seasonally adjusted figures.
So, where does that leave us? It’s up for debate how much the January numbers are overstating the degree of underlying strength. But, at the end of the day, there is little doubt that the labor market remains incredibly tight. For now, Chair Powell seems content to not rattle expectations and watch how the data evolves in further financial news. You can’t argue the logic. Monetary policy acts with considerable lag, and the cumulative effect of all the tightening done over the past 11 months is not yet being felt. Even once rate hikes are finished, the real effective policy rate will continue to rise through this year as inflation continues to decline (Chart 2). With the FOMC now in the “fine tuning” stage of the tightening cycle, data dependence will be the name of the game. With that, the focus now shifts to next week’s inflation report. Stay tuned!
Thomas Feltmate, Director | 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 February 3rd, 2023
Financial News Highlights
- The Federal Reserve hiked the fed funds rate 25 basis-points, a step down from six consecutive hikes of 50 or 75 bps.
- Non-farm payrolls accelerated in January for the first time in five months, adding 517k jobs and nearly tripling market expectations.
- The ISM Manufacturing Index dropped to its lowest level since May 2020, with new orders declining at an accelerating rate, while the ISM Services Index returned to strong growth after contracting in December.
Until the Job Is Done
With the first month of 2023 in the books, the start of February was marked by the much anticipated (but widely expected) rate decision delivered by the Federal Reserve on Wednesday in major financial news. Coupled with a sizeable upside surprise in the January employment data on Friday, markets certainly had a lot to think about this week. The S&P 500 rose 2.6% for the week, while the ten-year Treasury yield was little changed at 3.5% as of the time of writing.
Labor markets began 2023 with a bang, breaking a five-month deceleration trend and adding 517k jobs (Chart 1). This brought the unemployment rate down by 0.1 percentage points (ppts) to a 53-year low of 3.4%. In addition, revisions to 2022 data added 311k jobs to last year’s tally. The labor force participation rate in January ticked up by 0.1 ppts to 62.4%. Average hourly earnings rose by 0.3% month-on-month (m/m) and hours worked increased by 0.9% m/m. On aggregate, this was an exceptionally strong jobs report, which when combined with the sustained downward trend in initial jobless claims and the increase in December job openings, will give the Federal Reserve plenty to contemplate over the coming weeks.
In contrast to the strong labor market data, the ISM Manufacturing Purchasing Managers’ Index (PMI) slipped further into contractionary territory in January, dropping 1 percentage point to 47.4 – its lowest level since May 2020. Economic activity in the sector contracted for the third consecutive month, as new orders continued to decline at an accelerating rate. This contrasts with the ISM Services PMI which showed the industry return to strong growth in January after briefly contracting in December, with new orders jumping up by 15.2 percentage points. While there have been positive developments in the manufacturing sector, such as reduced delivery times and lower price pressures, the robustness of the strength in the services sector will be a concern for the Federal Reserve as it seeks to put a lid on services price growth.
February began with a partial return to conventional monetary policy in the U.S., with the Federal Reserve raising rates by a more usual 25bps for the first time since last March (Chart 2). FOMC Chair Powell noted that it was gratifying to see progress on disinflation, but that further policy tightening would be required to ensure price growth sustainably returns to the Fed’s 2% target in financial news. During the press conference, Powell also pushed back against the idea of assuming the Fed could mitigate the risk of a binding debt limit in June, stating that the only way forward was for Congress to raise the debt ceiling.
Markets expect another 25bps hike at the Fed’s next meeting in six weeks, at which time we will also receive an update on the Committee’s Summary of Economic Projections. The January employment report introduced fresh uncertainty to market expectations for the terminal rate, with May meeting expectations now evenly split between no change and a 25bps hike. Powell is in the hot seat in a Q&A next Tuesday, where he is likely to be pressed on his reading of the January jobs blowout. He is likely to confirm the hawkish bias of the press conference, and markets will be listening carefully for any hints of how high the Fed expects to raise rates now.
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 January 20th, 2023
Financial News Highlights
- Markets finished the week lower on weaker economic data and rising political risks.
- December retail sales registered the biggest monthly decline in 2022, finishing the fourth quarter flat. Housing starts were down less than expected, driven by the volatile multifamily component. Existing home sales continued to soften.
- This week’s Fed speakers demonstrated a varying degree of hawkishness on the pace of upcoming rate hikes. Yet, markets are all but priced-in a 25-basis point increase.
Bad News is Bad News
The week started with a holiday, but that didn’t stop markets from feeling the blues of the most depressing period in the Northern Hemisphere in financial news. At the time of writing, equities are down almost 2% on the week. On the political front, concerns about the government’s ability to pay its debts resurfaced as the Treasury Department was forced to begin taking ‘extraordinary measures’ in order to keep paying the government’s bills. By suspending certain additional investments, the Treasury buys Congress more time – likely until June - to negotiate a resolution on how to increase the debt ceiling. With the deadline still several months out, investors’ focus was squarely on the economic data. Unfortunately, there was little to cheer about.
Retail sales came in weaker than expected – falling 1.1% m/m - and marking the second consecutive month of declines. Most major categories were weak in both nominal and inflation adjusted terms. The only group that showed stronger demand was sales at gas stations, where real sales rose five percentage points on a sizeable drop in gas prices (Chart 1). The message is clear: consumers are becoming increasingly more cautious in allocating their income and pandemic savings. Moreover, judging by sales at restaurant and bars, demand for services might also be nearing an inflection point. The soft reading on retail sales led us to adjust our expectations for Q4 consumer spending down to a still robust 2.7% (previously 3.3%).
Housing activity also ended 2022 on a soft note. Residential construction declined for the fourth consecutive month, but by less than expected in December. The decline was attributed to a 19% drop in the multi-family segment. In contrast, starts in the single-family, rose for the first time in four months, but are likely to decelerate further in the months ahead as permits continue to trend lower (Chart 2).
On that note, existing home sales also continued to soften, falling 1.5% m/m December and 17.8% for the year. Despite the sharp decline in sales, prices have only fallen by 1.5%. However, the sharp increase in inventory since August suggests more meaningful downward pressure lies ahead.
Increasingly bold signs of cooling economic activity are welcome news for the Fed on its mission to bring down inflation. That said, this week’s Fed speakers had varying degrees of hawkishness on the pace of upcoming rate hikes. Of those who have the voting rights on the Federal Open Market Committee, James Bullard sounded most hawkish by expressing his preference to “err on the tighter side to get the disinflationary process to take hold”.
In contrast, Fed’s Lorie Logan and Patrick Harker voiced their support for a 25-basis point hike, while Vice Chair Lael Brainard, without explicitly backing a softer pace, emphasized the possibility of a soft lending - easing in the labor market and reduction in inflation without a significant loss of employment in further financial news. Markets side with this view, having priced-in a quarter-of-a percent hike on February 1st with a 97% probability. Compare it to exactly one month ago, when only 70% of market participants (including yours truly) expected a downshift. Seemingly, investors express more certainty about an economic slowdown ahead.
Maria Solovieva, CFA, Economist | 416-380-1195
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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