Featured Article: 401k and Retirement Changes
The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws
New policies for retirement saving would go into effect immediately or in the New Year
Americans will need to rethink how they save after Congress passed a series of laws that stand to overhaul parts of the country’s retirement saving system.
The retirement overhaul is part of a larger bill passed by Congress just before the holidays. It includes dozens of retirement policy changes that go into effect over the next decade. Many of these provisions kick in immediately after the bill passes, however, creating the need for Americans to examine their own financial planning now, financial advisers say.
The main changes that go into effect right away include incentives for more employers to offer retirement plans and to encourage workers to contribute, and new rules on taking money out and getting lifetime payouts.
Here’s a rundown of the key changes and what you might need to do:
New Rules for Taking Money Out
Required Minimum Distributions. The new legislation raises the age taxpayers generally have to start taking required minimum distributions, known as RMDs, from their retirement accounts to 73 from 72, starting in 2023. That means if you turned 72 in 2022, you have until April 1, 2023, to take your first RMD, the one for 2022, and you’ll have to take another for 2023 by Dec. 31, 2023. If you turn 72 in 2023, your first RMD will be for 2024, the year you turn 73, due on April 1, 2025.
The legislation doesn’t do anything to address the confusion surrounding the new 10-year payout rule for IRAs inherited after 2019.
Missed RMD penalty relief. Congress is reducing the 50% penalty for missed RMDs to 25% of the amount that should have been withdrawn. The penalty drops to 10% if it is corrected in a timely manner.
New exceptions to the 10% early withdrawal penalty. Typically, there’s a 10% penalty if you withdraw money from 401(k)s or other pretax retirement accounts before age 59 ½. The new legislation enhances several existing exceptions, including covering certain private-sector firefighters and public safety officers. It also adds new categories, allowing individuals who are terminally ill to make limited penalty-free withdrawals.
A catchall exception allowing anyone with a personal or family emergency to withdraw up to $1,000 a year penalty-free kicks in for 2024. A penalty exception for those affected by federally declared disasters is retroactive to Jan. 26, 2021. There are also exceptions for victims of domestic abuse and payment of long-term-care premiums.
New Rules to Encourage Savings
Small-employer retirement plan startup tax credit. If you work for a small employer with up to 50 employees that doesn’t offer a retirement plan, your company is eligible for an enhanced tax credit to start up a plan as of Jan. 1. The new credit covers 100% of initial costs up to $5,000 for three years, depending on the number of eligible employees. Employers with 51 to 100 employees get a lesser credit. There’s an additional credit if an employer also matches employee contributions, available for five years.
Solo 401(k)s. Under current law, self-employed individuals who want to establish an individual or solo 401(k) retirement plan have to set it up by Dec. 31 to make contributions for that year. Under the new provision, they have until they file their tax return the next year to open and fund the account, starting with the 2023 tax year.
$2,500 rainy day emergency savings accounts. The legislation allows employers to automatically enroll non-highly compensated employees, those who make up to $150,000 for 2023, in emergency savings accounts linked to a 401(k) plan. Employees could save up to $2,500, and withdrawals would be tax and penalty-free.
Gift cards. The legislation authorizes employers to hand out a small cash payment or gift card to encourage workers to sign up for and contribute to a 401(k)-type retirement plan. The idea is that some employees might respond to even a couple hundred dollars as a sign-up bonus, says Mark Iwry, a former Treasury Department official.
Roth employer matching. The new legislation permits employers to offer Roth matching contributions into an employee’s 401(k) account. Currently, employer match money goes into employee accounts on a pretax basis. Under the new rules, employees can now choose to take the Roth match, which means they are able to pay taxes up front and then later take out the contributions, and potentially the earnings, tax-free.
Lifetime Income Provisions
IRA Charitable Rollover. The legislation includes a provision that lets IRA owners who are 70 ½ or older take a one-time withdrawal of up to $50,000 to fund a charitable gift annuity or charitable remainder trust. That’s a tax win for IRA owners because the withdrawal doesn’t count as income, and it can count toward any required minimum distribution amount for the year.
They generally work like this: The IRA owner gets a minimum payout of 5% annually, taxed as ordinary income, and the charity gets what’s left when the donor dies. The only beneficiaries can be the owner alone or the owner and his or her spouse.
“Charities are going to be telling all their donors about this,” says Conrad Teitell, a tax lawyer in Stamford, Conn., who publishes Taxwise Giving. Effective date: Jan. 1, 2023.
Deferred annuities. For retirees looking for guaranteed income in their old age, the retirement legislation enables more people to take advantage of qualified longevity annuity contracts, known as QLACs, says Mr. Iwry, who spearheaded Treasury’s development of QLACs in 2014.
A QLAC is a deferred annuity that you can buy, say in your 60s, with guaranteed payouts for life starting at age 80 or 85, for example. Under the new rules, 401(k) participants or IRA owners could use up to $200,000 from their account to buy the annuity that would make guaranteed payments for life. Current rules limit the QLAC amount to $145,000 or 25% of the retirement account balance, if less.
“QLACs cover the tail risk of outliving your retirement savings,” Mr. Iwry says. Effective date: when the act is signed into law.
Write to Ashlea Ebeling at ashlea.ebeling@wsj.com
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Financial News for the Week of January 13th, 2023
Financial News Highlights
- After fifteen rounds of votes, Kevin McCarthy was elected the new House Speaker. However, it didn’t come without making major concessions, setting the stage for more political brinksmanship over the coming months.
- Headline inflation came in below expectations – falling 0.1% m/m. The core measure rose by 0.3% m/m, bring the 12-month change to 5.7% - the slowest pace of price growth in a year.
- Data out this week showed that labor market remains incredibly tight. The number of small businesses with unfilled job openings remains historically elevated while jobless claims have steadily trended lower over the last month.
Inflation Turning, But Victory Still Nowhere Insight
This week ushered in a new House Speaker and a fresh reading on CPI in major financial news. The former came after fifteen rounds of votes and several concessions made by Speaker McCarthy. Of those, arguably the biggest was a commitment to pairing an increase in the debt ceiling with cuts in government spending. U.S Treasury Security Janet Yellen informed Congress that the debt limit could be reached as early as next week, and Treasury will start to employ extraordinary measures which are expected to last until June. With Democrats unwilling to tie debt ceiling negotiations to cuts in spending, we are headed for more fiscal brinkmanship over the coming months.
After last week’s payrolls report, investors were eager to see the December reading on U.S. CPI to better gauge the future path of the policy rate. Going into the week, most market participants expected a further downshift in the pace of rate hikes when the FOMC next meets in early-February. Inflation is (finally) moving in the right direction, solidifying market pricing for a 25-bps hike in financial news. Equities were up 2% on the week, while the U.S. 10Y fell by roughly 10-bps and currently sits at 3.45%
Headline inflation fell 0.1% m/m – a tick below expectations – with the pullback largely attributed to weaker gasoline prices (-9.4%). The core measure rose by 0.3% which brought the twelve-month change to “just” 5.7% – the slowest pace of growth in over a year. Even more encouraging was the steady downward trend in the three-month annualized change, which now sits at 3.1% (Chart 1).
Distortions from the pandemic continued to show further evidence of easing, with core goods prices (-0.3%) falling for the third consecutive month. Declines were primarily concentrated in transportation, while most other categories were higher on the month. That said, retail inventories have been piling up more recently, suggesting we are likely to see further price declines in things like apparel, furniture, and electronics in the months ahead. While encouraging, a softening in goods prices alone can only go so far in bringing down inflation. Core services will also need to slow, and herein lies the problem. Shelter continues to make outsized gains and is not expected to rollover until mid-year. Meanwhile, services (excluding shelter), whose price growth is more closely tied to wages, is unlikely to slow until we see some softening in underlying labor market conditions. And that doesn’t appear to be on the immediate horizon.
Data out this week showed that while the number of small businesses reporting job openings are declining, they remain historically elevated (Chart 2). As a result, nearly half of small businesses surveyed reported having increased compensation in recent months, while more than a quarter are planning to boost wages over the next three months. Elsewhere, jobless claims continued to edge lower through the first week of January – falling to 205k – with the four-week moving average having steadily declined since late-November. Putting all this together suggests the labor market remains incredibly tight and has not yet reached an inflection point. So while inflation may be easing, the Fed is nowhere near declaring victory. We expect more tightening to come over the coming months – likely in the form of two 25-bps hikes – before pausing to assess the cumulative impact of all 475-bps of tightening.
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 January 6th, 2023
Financial News Highlights
- The labor market cooled modestly in December, with 223k new jobs added and the unemployment rate ticking back
down to 3.5%. - The House of Representatives failed to elect a Speaker of the House on the first ballot for the first time in 100 years,
delaying the start of the new legislative session in the lower chamber of Congress. - FOMC minutes from the December meeting underlined the hawkish stance of the committee and warned of the
dangers of a pre-mature easing of financial conditions.
Plenty of Jobs, Except in Congress
The start of the new year kicked off with several important December data releases, including an update on the labor market and FOMC meeting minutes in financial news. In addition, the new Congressional session got off to a rocky start, with the House of Representatives unable to elect a Speaker of the House. Equity markets fluctuated on the week with the S&P 500 down 0.4% while yields declined sharply, with the 10 Year Treasury at 3.58% as of the time of writing.
The exceptional strength seen in the jobs market over the past two years slowed into the end of 2022, with December adding 223k new jobs and bringing the annual total to 4.5 million (Chart 1). The labor market remained tight with the unemployment rate declining back to 3.5% as the labor force rose by 0.3% and the participation rate ticked up by 0.1 percentage-points. Average hourly earnings growth decelerated to 0.3% month-on-month, inciting an initial rally in equity markets as participants looked for evidence which might lead to a reprieve from the current aggressive round of rate hikes. The report also showed a notable uptick in the number of multiple job holders reflecting the weight of inflation and rate hikes on households as they seek additional support through secondary incomes.
Earlier in the week, manufacturing data showed signs of further slowing, with the ISM manufacturing purchasing managers’ index (PMI) slipping further into contractionary territory in December (Chart 2). After two years of growth the industry has begun to give back some of its gains, in large part due to the direct and indirect effects of higher rates. We also saw this play a part in the ISM Services PMI which declined sharply and showed the sector contracting in December for the first time in 30 months. Within the services index, declines were led by new orders which dropped sharply by over 10.8 percentage-points relative to November. On a more positive note, the manufacturing report showed a continued decline in supply price pressures and improving delivery times, which will be welcome news for the Federal Reserve.
FOMC meeting minutes released on Wednesday unsurprisingly echoed earlier sentiments expressed by Chair Powell at his December 14th press conference. Members pushed back against the loosening of financial conditions seen in recent months on the back of softer inflation reports, noting that “an unwarranted easing in financial conditions…would complicate the committee’s effort to restore price stability” in financial news. The minutes reiterated that “it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path”, and this was further emphasized by the fact that no committee members foresee cutting rates this year.
Minneapolis Fed President (and 2023 FOMC member) Neel Kashkari also released an essay on Wednesday in which he noted the need to raise rates by another 100bps this year, which helped to briefly push the odds of a 50bps hike in February close to 50%, though they have since declined back to roughly 25%. Next week we will get December CPI data which will help clarify whether the recent downturn in inflation persisted into the end 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 December 16th, 2022
Financial News Highlights
- The FOMC downshifted its tightening race in December, raising the policy rate by 50-bps, bringing the operating band to 4.25%-4.5%.
- The FOMC’s Summary of Economic Projections showed a less optimistic economic outlook, accompanied by higher inflation. The median consensus on the Fed Funds rate was lifted by 50-bps for 2023, implying a terminal rate of 5.25%.
- November inflation data showed a further softening in price pressures, with core CPI rising 0.2% m/m and the 12-month change falling to 6% y/y. Retail sales for November were weaker than expected (-0.6% m/m), recording its largest monthly decline in 11 months.
Slowing, But Not Stopping
Phew, whatta week for financial news! The headlines included further evidence of softening inflation, wanning consumer momentum and the much-anticipated December FOMC interest rate announcement. The Fed met market expectations, increasing the policy rate by “only” 50 basis-points (bps), bringing the upper-bound to 4.5%. That marked a slowdown from the 75-bps pace undertaken at the four prior meetings, but still stands as a historically fast pace of policy adjustment (Chart 1).
Beyond the interest rate announcement, the FOMC also released updated economic projections. Relative to the September assessment, Committee participants now expect growth to be considerably weaker in 2023 (0.5% vs 1.2%) and the unemployment rate slightly higher (4.6% vs. 4.4%). Despite the more downbeat outlook, policymakers view price pressures as having become more entrenched, and upgraded the inflation outlook through 2024. As a result, the FOMC signaled rates are likely to move at least 50-bps higher than previously expected next year – implying a terminal rate of 5.25% – with cuts not beginning until 2024.
In the press conference, Chair Powell struck a somewhat hawkish tone. When asked about the recent easing in financial market conditions, Powell stated that the Committee looks through near-term swings, but emphasized the importance of market conditions aligning to the Fed’s intentions. Moreover, Powell was quick to direct focus to the upward revision to the “dots”, reiterating that the Committee’s view on inflation remains skewed to the upside and thus future projections could still show an even higher terminal rate. Despite this deliberate signaling, market participants still believe that the Fed will begin cutting rates late next year.
Investors current assessment might be somewhat biased by November’s CPI data, which showed a further cooling in inflationary pressures. Core inflation rose by 0.2% m/m – a tick below market expectations – bringing the 12-month change to 6.0%. Core goods prices declined for a second consecutive month, while price growth across services continued to be led by outsized gains in shelter. That said, even after removing its effects, most other service categories continue to show strength. This cuts to the heart of the issue. With goods prices appearing to have rolled over and the shelter component expected to slow in H2’2023, the move down towards 3% inflation by the end of next year is feasible. However, until we see a more meaningful slowdown in hiring activity, leading to a cooling in wage pressures, many labor-intensive service sectors will continue to run hot – preventing inflation from moving back to 2%.
Though the cumulative impact from higher rates hasn’t yet hit hiring intentions, November retail sales showed consumer momentum may be wanning. Sales fell 0.6% m/m – its biggest monthly drop in nearly a year – with notable declines in holiday categories including, electronics, clothing, and sporting goods. As we noted in our Quarterly Economic Forecast, it was unrealistic to assume the recent strength in spending would continue indefinitely. A broader demand adjustment needs to occur over the coming quarters in order to restore price stability. It would appear we are nearing the precipice of that adjustment.
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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Featured Article: The 5 Best Places to See an Untouched Winter Wonderland
The 5 Best Places to See an Untouched Winter Wonderland
There’s something undeniably magical about a pristine, snowy winter landscape. Smoke rising from chimneys, the Northern Lights dancing above you, hot cocoa warming your hands while snowflakes fall outside your window. From soaking in hot springs to ice skating under mesmerizing mountain peaks, we’ve gathered up the best places to see an untouched winter wonderland around the world. Bundle up, grab a warm beverage and come with us to these snowy destinations.
Lapland, Finland
The far northern reaches of Finland, known collectively as Lapland, are a remote winter landscape utterly untouched. The scattered residents who call this region home carve out snowmobile trails as the polar night engulfs them for two solid months of darkness.
This might be one of the best places in the world to cross the northern lights off your bucket list. Polar nights allow a longer window of time to witness them while crisp winter air makes for perfect viewing conditions. As an added bonus, you can pay Santa Claus himself a visit in the village of Rovaniemi, and pet some of his reindeers.
When the cold starts to seep into your bones, hole up in a traditional Finnish sauna. The tradition of hitting fellow sauna goers with Birch branches is said to increase circulation, helping you thaw from the extreme cold that can reach -40 degrees.
Yellowstone National Park, Wyoming, USA
Winter is an ideal time for visiting Yellowstone National Park as crowds thin, geysers soar, and wildlife spotting becomes more likely. The contrast of bubbling hot springs and volcanic activity juxtaposed with the icy landscape creates an otherworldly effect that has to be seen to be believed.
There is no shortage of winter activities in America’s first national park including snowmobiling, snowshoeing, and cross-country skiing. If you’re feeling up for a splurge, organize a snowcoach for a frozen safari through the desolate landscape. These methods of transportation are some of your only options after the first week of November. Roads don’t open again until the end of April so be sure to plan around travel restrictions. At the end of your trip, head to Mammoth Hot Springs at the northern edge of Yellowstone to thaw out from your icy adventures.
Banff, Canada
Maybe one of the most picturesque places on our list, Banff is a stunning winter destination located in the heart of the Canadian Rockies. Visitors can enjoy ice skating with beautiful views of Lake Louise or a ride in the Banff gondola for sweeping panoramas of the wintery scenes below. If you’re lucky, Banff is another destination on this list where it’s possible to see the northern lights dance across the mountains. When conditions are right the best place to view them is at Lake Minnewanka, located about 10 minutes outside the city, with open sky views.
Chamonix, France
In the shadow of Mont Blanc, Chamonix is one of the premier destinations in Europe for winter sports. From extreme alpine skiing to dog sledding, there’s something for everyone in this frozen mecca.
If you’re feeling adventurous, take the Aiguille du Midi, to see the top of Mont Blanc. Here you can “Step Into the Void” by literally stepping out over a 1,000 foot drop covered by a glass atrium. Chamonix is also home to the largest glacier in France, Mer de Glace. The most scenic way to get there is aboard the Train du Montenvers with sweeping views of the Alps. After you’ve arrived, step inside the glacier itself in the Ice Cave or learn about global warming’s effect on the ice at the Glacorium. Afterwards Indulge in the local alpine cuisine raclette, melted cheese traditionally scraped over vegetables and meat, after a long day on the slopes.
Shirakawago, Japan
Japan is home to several cities with the highest snowfall records in the world. The island country’s unique geography causes ocean air to become trapped against the Japanese Alps resulting in huge snowfalls. Shirakawago sees 33 feet of snowfall on average in the winter months from December to March, making it one of Japan’s must-see winter wonderlands.
Shirakawago’s combination of extreme snowfall and unique cultural attributes caught the attention of UNESCO who designated it a World Heritage site. The idyllic Gassho-style houses that are nestled in the village of Ogimachi are built to withstand the extreme snowfall, giving them their unique look and architecture that allows snow to slide off the roof. Every year for six consecutive Sundays in January and February the village does an illumination ceremony, lighting up the iconic homes.
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Financial News for the Week of December 9th, 2022
Highlights
- Somewhat unexpectedly, the ISM services index accelerated in November, with the business activity sub-index expanding to a level last seen in 2021.
- The services sector continues to struggle with elevated inflation as the prices paid component of the ISM services index and the services side of the producer price index showed no signs of price relief.
- Despite higher rates, consumers continued to borrow to support their spending. This underscores the degree of resilience of the U.S. consumer but increases prospects for a weaker economy next year as the Fed will have to move into more restrictive territory.
Waiting for the Fed
A slow week on the economic data front gave markets time to reflect and prepare for the FOMC meeting next week, which will include an update to the Fed’s economic projections in financial news. The consensus has solidified for a 50-basis points (bps) hike, but the Wall Street jury is out on how far the Fed will have to raise policy rates this cycle. Price volatility this week underscores increasing concerns that higher policy rates could tip the U.S. economy into recession.
On Monday, the ISM Services index reported an acceleration in the services sector. Somewhat unexpectedly, the business activity sub-index expanded by whooping nine percentage points lifting it to a level last seen in 2021. This is in stark contrast with the manufacturing sector’s production index, which moved into contractionary territory. The pick-up in services activity was backed by remaining pent up demand, further boosted by the start to the holiday season as industries like Accommodation & Food Services and Retail Trade entered their busiest month of the year.
The prices sub-indexes reinforce the contrast between the two sectors. While the manufacturing sector has seen a significant deterioration in the prices paid component, which contracted in November with a reading of 43, it’s taking much longer for the services sector to see signs of price relief, with the sub-index remaining mired around 70 (Chart 1). Higher prices also appear to be broad-based with 16 out of 18 industries reporting higher prices. The Producer Price Index (PPI) for November provided another example of the sectoral divergence in price pressures. The PPI advanced by 0.3% month-on-month in November, driven by a 0.4% increase rise in services prices.
Tuesday’s trade data showed that goods exports declined in October, with a notable weakness in industrial supplies and materials (includes petroleum products), providing more evidence of dwindling demand from overseas. This contributed to a widening in the trade deficit to $78.2 billion in financial news. Imports also improved marginally supported by an increase in domestic demand for foreign goods, partially offset by weaker services imports from abroad.
Consumer demand has proven a bit more resilient recently, and it looks to have been supported by consumer credit, which continued to expand in October despite higher interest rates. Consumer credit outstanding increased by $27.0 billion on the month (7.1% annualized), driven by nonrevolving credit, which gained $17.0 billion (Chart 2). Revolving credit added $10.1 billion, reflecting consumers stronger reliance on credit card debt as pandemic savings continue to dwindle. We think that consumers will add more leverage to support real spending growth of roughly 1.5% in 2023 – a step down from 2.8% expected in 2022.
That forecast underscores the degree of resilience coming from the U.S. consumer, but the cumulative effect of higher interest rates may create stronger headwinds than currently anticipated. Stronger domestic demand and higher inflation increases prospects that the Fed will have to move rates into more restrictive territory. Wednesday’s FOMC decision will feature the dot plot, so we won’t have to wait much longer to see the Fed’s latest thinking.
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 December 2nd, 2022
Financial News Highlights
- Employment rose by 0.2% month-on-month (m/m) for the fourth consecutive month in November, surpassing expectations for a moderate slowdown in job growth.
- Core PCE inflation for October eased slightly to 5% year-on-year (y/y), but was supported by strong spending growth and a drop in the consumer savings rate to a 17-year low.
- FOMC Chair Powell noted in his speech on Wednesday that rate hikes may slow as early as December but reiterated that the Fed has a long way to go in restoring price stability.
U.S. - The Job Market Marches On
Markets had to hit the ground running after the Thanksgiving holiday, with a full slate of economic data and financial news. The November jobs report, personal income and spending data for October, and FOMC Chair Powell’s speech on Wednesday were just the headliners. Markets rallied to start the week, but gains were pared back after the release of the November jobs report on Friday. At the time of writing, the S&P 500 is up 0.3% on the week while the ten-year yield is down 10bps to 3.59%.In November, the seemingly indomitable U.S. labor market recorded another strong rise in employment. Non-farm payrolls rose by 263k jobs, rising at a pace of 0.2% month-on-month (m/m) for the fourth consecutive month (Chart 1). The unemployment rate remained unchanged at 3.7%, while the labor force declined slightly (-0.1% m/m). Average hourly earnings accelerated by 0.6% m/m, doubling market expectations.
Oil prices rose this week after Chinese officials eased up on their Zero-Covid messaging in the wake of wide-spread protests. With health protocols expected to be loosened heading into 2023, the prospect of renewed Chinese demand drove oil prices higher. Looking to next week, OPEC+ will have its bi-monthly meeting on Sunday after previously cutting production by 2 million barrels per day in October. The following day, the EU will implement its embargo on Russian oil. European officials also recently announced a $60 per barrel price cap on Russian oil, which they intend to implement in coordination with the G7 and Australia on the same day their embargo goes into effect. Overall, bullish sentiments linger in the oil market as we head into the final month of the year.
Personal income saw a healthy gain in October (+0.7% m/m), driven by strong growth in employee compensation (0.5% m/m) alongside one-time refundable tax credits issued by states. Consumers were keen to spend those gains, with spending rising even more (+0.8% m/m). That took the consumer savings rate to a 17-year low of 2.3%. It wasn’t all inflation either. Controlling for taxes and inflation, income rose 0.4% m/m. Real spending was up a healthy 0.5% m/m, which puts third quarter consumer spending on track for a healthy gain. Headline PCE inflation fell 0.2 percentage-points (ppts) to 6% y/y (Chart 2) while the Fed’s preferred core PCE measure fell 0.1ppts to 5% y/y.Earlier in the week we heard from Chair Powell for the first time since the November FOMC meeting. His remarks were little changed overall, but markets reacted strongly to his statement that “the time for moderating the pace of rate increases may come as soon as the December meeting” in major financial news. This reaction, however, overlooked his reiteration that the FOMC has “a long way to go in restoring price stability” and that this will likely require “holding policy at a restrictive level for some time”. Coupled with his insistence that the FOMC will need to see “substantially more evidence to give comfort that inflation is actually declining” alongside the strong November jobs report, it is fair to say that their job is far from done.
Andrew Foran, Economist | 416-350-8927
Markets had to hit the ground running after the Thanksgiving holiday, with a full slate of economic data and financial news. The November jobs report, personal income and spending data for October, and FOMC Chair Powell’s speech on Wednesday were just the headliners. Markets rallied to start the week, but gains were pared back after the release of the November jobs report on Friday. At the time of writing, the S&P 500 is up 0.3% on the week while the ten-year yield is down 10bps to 3.59%.
Personal income saw a healthy gain in October (+0.7% m/m), driven by strong growth in employee compensation (0.5% m/m) alongside one-time refundable tax credits issued by states. Consumers were keen to spend those gains, with spending rising even more (+0.8% m/m). That took the consumer savings rate to a 17-year low of 2.3%. It wasn’t all inflation either. Controlling for taxes and inflation, income rose 0.4% m/m. Real spending was up a healthy 0.5% m/m, which puts third quarter consumer spending on track for a healthy gain. Headline PCE inflation fell 0.2 percentage-points (ppts) to 6% y/y (Chart 2) while the Fed’s preferred core PCE measure fell 0.1ppts to 5% y/y.
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 November 25th, 2022
Financial News Highlights
- Minutes from the November FOMC meeting showed a sizeable majority of members were receptive to the idea of slowing the pace of rate hikes in the near-term.
- New home sales jumped 7.5% month-on-month (m/m), far outpacing expectations for a moderate decline, but remain down 5.8% year-on-year (y/y).
- Consumer sentiment declined in November for the first time since June, marking a return to the downward trend which started in the third quarter of 2021.
U.S. - FOMC Eyes Half-Point Hike
The holiday-shortened week was quiet overall, but did provide a healthy dose of Fed speak, new home sales data, and updated consumer sentiment readings in financial news. Due to lower trading volumes and shorter trading hours in the lead-up to the holiday, market movements this week were muted. The S&P 500 rose 1.5% on the week, while Treasury yields continued their gradual decline, with the 10-Year yield dropping 9 bps to 3.73% as of the time of writing.
October’s CPI report has been the centerpiece of market thinking since its release two weeks ago. Fed speakers this week attempted to strike a balanced tone. San Francisco Fed President Daly started the week stating, “although one month of data does not a victory make, the latest inflation report had some encouraging numbers”. Cleveland Fed President Mester in a separate media appearance added that more work still needed to be done, but that “it makes sense that we can slow down a bit”.
The November FOMC minutes released on Wednesday echoed this sentiment, noting that “a substantial majority of [FOMC] participants judged that a slowing in the pace of increase would likely soon be appropriate”. As of the time of writing, markets are expecting the Fed to raise rates by 50bps in December (Chart 1) in financial news. Next week’s October PCE inflation and November jobs reports should provide further clarification on the Fed’s progress thus far and how much further it may have to go.
November new home sales surprised to the upside, rising 7.5% month-on-month (m/m) versus an expected decline. However, sales are still down on the year (-5.8% year-on-year, y/y). We don’t expect November’s uptick to be sustained. Mortgage rates remain elevated, homebuilder sentiment is at its lowest level since June 2012 (excluding the early pandemic low), and existing home sales have declined for nine consecutive months as of November.
On the consumer front, we saw the University of Michigan consumer sentiment index reading for November drop 3.1 points to 56.8 (Chart 2). The index had previously notched four consecutive months of gains after a precipitous drop in the second quarter of this year, as the robustness of the labor market, combined with a build-up of savings had provided a cushion to consumers. However, with the unemployment rate ticking higher, job growth slowing, and excess savings winding down, the dual shock of higher rates and higher prices present a stronger headwind.
On a cheerier note, holiday air travel is expected to roughly return to its pre-pandemic level this week. Coupled with the expected spike in retail sales driven by Black Friday deals, the Thanksgiving holiday should provide partial short-term insulation from some aspects of the impending economic slowdown. Next week we’ll see whether job growth decelerated in November, or whether the Fed may have more to think about at its last meeting 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 November 18th, 2022
Financial News Highlights
- Results from the midterm elections showed the Democrats maintained control of the Senate but lost their majority in the House of Representatives.
- U.S. housing data continue to slide in October, with housing starts down 4.1% m/m to 1.4 million units, while existing home sales fell 5.9% m/m to 4.3 million.
- Retail sales surprised to the upside in October, rising by 1.3% m/m. Gains were relatively broad based and suggest the U.S. consumer remains on a firm footing. Real consumer spending is set to accelerate to 3% in Q4.
Consumer Resilience on a Timer
After a week of ballot counting, results from the midterm elections showed that the Democrats maintained control of the Senate but lost their majority in the House of Representatives. With the Republican’s now having narrow control of the House, we have returned to a divided Congress, limiting prospects of new legislation over the next two years.
A partisan Congress raises the odds of another government shutdown or debt-ceiling showdown at some point next year (Chart 1) in financial news. We could get a firsthand glimpse of what’s to come as early as next month when the current ‘continuing resolution’ funding government spending expires on December 16th. At a minimum, Congress will need to negotiate another short-term patch to keep the federal government open. The other challenge that will come up in the coming months is the need to raise the debt-ceiling. Fortunately, the U.S. Treasury is estimated to have enough wiggle room in its existing cash holdings to fund the government through at least mid-2023.
Looking to this week’s economic data, the impact of higher interest rates continued to tighten its grip on the housing sector. New home construction fell 4.2% m/m to 1.4 million units in October and is now down 19.4% since the beginning of the year. While the pullback continues to be concentrated across the single-family segment, the recent plateauing in multifamily permits suggests it too has peaked (Chart 2). Things look even more dire in the resale market. Mortgage rates reached 7.2% in October, and sales fell by another 5.9% m/m to 4.3 million and are now (outside of the pandemic lockdown period) at the lowest level since 2011. Inventory has remained tight so far and so the impact to prices has been small, with the median home price down just 3.5% from its peak. Because most homeowners hold mortgages originated at rates lower than today’s prevailing rate, listings are unlikely to spike like during the last housing crisis. As a result, the market will remain undersupplied for some time, limiting the downside pressure on prices.
In stark contrast to the housing sector, the U.S. consumer continued to show considerable staying power in October. Retail sales came in much better than expected, rising by 1.3% m/m. Indeed, some of the strength in October was already telegraphed earlier in the month when new vehicle sales jumped 10% m/m to 14.9 million units in financial news. However, even after stripping out autos, sales at gasoline stations, and building materials, the ‘control’ measure still rose by a healthy 0.8% m/m.
After incorporating the October retail sales data, our current tracking for Q4 GDP sits at 2.2%, with consumer spending expected to expand by 3%. This is an acceleration from Q3 and underscores the degree of resilience we’re still seeing from the U.S. consumer. However, it would be a stretch to believe that the rapid adjustment in interest rates won’t eventually take a toll. Let’s not forget, the Fed still has ‘a ways to go’ before even reaching its terminal rate. Moreover, it can take anywhere from 12-18 months to feel the full effect of higher interest rates. By this logic, we expect a broader demand adjustment to begin early next year, with growth expected to fall to a stall-speed in 2023.
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 November 11th, 2022
Financial News Highlights
- Republicans look to have won control of the House in this week’s midterm elections. The Senate race remains too close to call. With Washington more divided, major spending and tax changes are less likely, while some risks increase (i.e., the potential for a government shutdown).
- CPI inflation eased in October, with headline CPI decelerating to 7.7% y/y (from 8.2%) and core CPI cooling to 6.3% y/y (from 6.6%). Shelter costs remained a key contributor to inflation.
- Small business confidence pulled back a bit in October, but job openings remained unchanged near record highs.
Markets Cheer Inflation Easing a Touch
The midterm elections took center stage for much of the week, although markets were most encouraged by good news on the inflation front on Thursday in financial news. Republicans look to have won control of the House, capturing an estimated 208 seats thus far (vs. 185 for Democrats), while the Senate remains too close to call. We may need to wait until Georgia’s runoff election on December 6th, to know the final result, depending on races in Arizona and Nevada.
Either way, Washington is looking more divided than it was a week ago, and the chance that new major policy measures get the three required checkmarks – House, Senate and White House – have diminished. Indeed, large scale fiscal spending measures and major tax changes seem unlikely over the next two years. In this vein, the midterms should not have a major impact on economic growth in financial news. There are, however, risks that come with a divided Congress. One concerning aspect is the potential for a lack of agreement to fund government programs in the near-to-medium term, which could lead to a government shutdown, or debt-ceiling standoff, which raises the (unlikely) risk of a default on debt or leave other bills unpaid. These issues, which have the potential to significantly disrupt financial markets, as they’ve done in the past, are added risks for a slowing economy in the year ahead.
Inflation was likely top of mind for many voters as they headed to the polls, as it has been taking a sizable bite out of consumers’ wallets this year. The Consumer Price Index (CPI) showed that inflation eased in October, for both headline and core CPI, with the latter decelerating to 6.3% year-on-year (y/y) from 6.6% in the month prior (Chart 1). In month-over-month (m/m) terms, core CPI decelerated meaningfully to 0.3% in October from 0.6% previously. Core goods prices declined 0.4% (m/m) amidst a pullback in several categories such as appliances, apparel and used car prices. Price growth across core services (0.5%) also moderated from last month’s gain of 0.8%, driven by a notable pullback in health care services (-0.6%). However, shelter costs (0.8%) remained a meaningful contributor.
All in all, inflation has eased a bit, in part because of the pullback in core goods prices. However, it remains well above the Fed’s comfort zone, and (without wanting to sound like a broken record) we’re likely to see continued gains in the shelter component over the near term (see here). So, we’re not out of the woods just yet.
As Fed Chair Powell noted recently, the Fed has reached a point where it will dial back the pace of rate hikes, but there’s quite a bit more to be done in raising rates. Underpinning this hawkish tilt is the broad resilience in the labor market. Job openings for instance, have eased a bit, but remain plentiful – a message echoed by the NFIB small business survey (Chart 2). Still, cracks continue to form in some corners of the economy, case in point the tech sector. Layoffs at Meta and Redfin (online real estate broker) amounting to 13% of their workforces added to the string of cuts announced in the tech space this year. Meanwhile, the higher interest environment is expected to continue weighing on the housing market, with weak prints likely to follow in next week’s housing starts and existing home sales reports. Bringing inflation down comes at a cost.
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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