Financial News for the Week of August 19th, 2022
Financial News Highlights
- Total retail sales were flat in July, marking a deceleration from June’s pace. However, sales in the control group, which exclude several volatile categories and are used in calculating GDP, rose a sturdy 0.8% m/m.
- Housing continued to cool in July. Existing home sales fell 5.9% and the median seasonally adjusted home price retreated for the second month in a row. Homebuilders also continued to ease off the accelerator, with starts down 9.6% in July.
- Minutes from last month’s FOMC meeting revealed that many participants acknowledged the risks that that the Committee could tighten the stance of policy by “more than necessary”.
How Quickly to Raise Rates? That Is the Question
The third week of August was a busy data week for the U.S., with updates on housing and the consumer for July in financial news. The consumer spent a little more than expected at retailers (omitting auto dealers and gas stations), thanks to a successful Amazon Prime Day event, but housing is continuing to recalibrate to the higher rate environment.
Headline retail sales were flat in July, marking a deceleration from June’s 0.8% month-over-month (m/m) gain. However, the headline measure was dragged down by sales auto & part dealers (-1.6%) and gasoline stations (-1.8%), the latter reflecting lower prices at the pump. Retail sales in all other categories rose a sturdy 0.7% m/m. Similarly, sales in the control group, which strip a couple of more categories from the total and are used in calculating personal consumption expenditures and GDP, were up 0.8% m/m thanks to a boost from sales at non-store retailers (Chart 1). Total CPI inflation was flat in July, so by these measures, real goods consumer spending appears to have had a decent start to the third quarter.
Consumers also spent handsomely at building material and supply dealers last month (+1.5% m/m), a move that went against the grain of the ongoing weakening in housing. Existing home sales fell by almost 6% in July, extending their downward slide from the start of the year to a staggering 26%. Home prices have also been feeling the impact of higher rates, with the median seasonally adjusted home price falling in each of the last two months (Chart 2). The fact that mortgage rates have eased a bit over the past several weeks could provide an opportunity for the housing rout to take a breather. However, the Fed is not done hiking rates, so affordability is likely to remain a meaningful constraint for the foreseeable future. As a result, we expect home sales to continue trending moderately lower through the first half of next year.
Homebuilders have continued to ease off the accelerator amidst this challenging market backdrop, with starts falling 9.6% in July. The weakness in homebuilding over the last several months has been concentrated in the single-family market. A recent sharp decline in homebuilder confidence in this sector suggests that the trend is poised to continue.
The fallout from the downturn in the housing market is only one factor the Fed must consider as it gears up to raise rates again next month in further financial news. Minutes from last month’s FOMC meeting revealed that many members acknowledged the risks that the Committee could tighten the stance of policy by “more than necessary”. In addition, participants judged that as the policy rate is tightened further “it would become appropriate at some point to slow the pace of policy rate increases” to assess the impacts. Markets interpreted this as a signal that the pace of rate hikes would slow soon, but a few Fed officials (i.e., Bullard, voting member, backs a 75-basis point (bp) hike next) appeared to push back against that notion. For now, markets are pricing in a 50-bp hike at the next meeting. Chair Powell’s Jackson Hole speech next Friday will be closely watched to gauge the Fed’s latest thinking as to where rate hikes are headed.
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.
To see more news reports, click here.
Financial News for the Week of August 12th, 2022
Financial News Highlights
-
- The U.S. Senate passed a climate, healthcare, and tax bill known as the Inflation Reduction Act of 2022 earlier this week. The legislation is now off to the House of Representatives for a final vote later today where it is expected to pass.
- July CPI came in weaker than expected, with the headline measure flat on the month and core “only” increasing by 0.3% month-over-month.
- While the deceleration in inflation comes as welcome news to policymakers, Fed officials have reiterated that more tightening will be required to achieve price growth stability of 2%.
U.S.-Inflation Was the Word of the Week
It was a week full of surprises, with inflation being the key theme in financial news. Chief among them was the U.S. Senate quickly moving to pass the Inflation Reduction Act of 2022 (IRA). It now heads to the House of Representatives later today for a final vote, where it’s expected to pass. The reconciliation bill is a significantly scaled back version of the far more ambitious Build Back Better Act, though it still incorporates many of the key climate related initiatives that were included in the previous bill.
In terms of broad strokes, the IRA aims to spend roughly $430B on climate and healthcare initiatives over the next decade and is estimated to more than offset those expenditures with $740B of proposed revenue. Over 85% of the appropriated expenditures will be directed towards climate related initiatives and will be dispersed mainly through grants and loans. Of those investments, perhaps most noteworthy is the $80B in new rebates allocated to eligible households for electric vehicles (EVs) and to help decarbonize residential buildings. The additional funding for EVs not only maintains the existing $7,500 rebate but also introduces a new tax credit of up $4,000 for both used and new EVs, with the latter applying only to those vehicles made in North America.
On the healthcare side, the IRA will put a cap of $2,000 on out-of-pocket prescription drug costs for individuals on Medicare. It also aims to bring down the cost of the most expensive drugs by allowing the government to negotiate the price of a subset of those drugs covered by Medicare, though this won’t start until 2026.
All of this will be paid for through a new 15% minimum corporate tax imposed on corporations earning more than $1B, enhancements to the IRS audit and review process, and taxing share buybacks. The fact that the deficit will be reduced over the next decade is what is being used to justify the “inflation reduction” element of the bill. However, the total deficit reduction is only estimated to be $400B (or 1.6% of GDP), and will be spread over the next decade – suggesting the impact to growth and inflation will likely be negligible.
Turing to the other surprise this week, July CPI data (finally!) came in weaker than expected. The headline index was flat on the month, while core prices “only” rose by 0.3% m/m (Chart 1). Indeed, the recent pullback in energy prices subtracted from the headline measure, though accelerating food prices provided a partial offset in further financial news. Looking to the core measure, there were a few encouraging tidbits. Core services grew by 0.4% m/m – down from the 0.7% m/m reported in June. A lot of the pullback was the result of a softening in travel-related categories, such as airfares, car rentals, and lodging away from home (Chart 2). Other green shoots emerged on the goods side, as prices across most categories decelerated, while used vehicle prices, apparel, and education goods all declined.
This will be welcome news to FOMC officials, but as San Francisco Fed president Mary Daly said on Wednesday “it’s still too early to declare victory”. Daly reiterated her support to dial back on the pace of rate hikes in September but didn’t rule out another 75bps move should the turn in inflation prove to be fleeting.
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.
To see more news reports, click here.
Financial News for the Week of August 5th, 2022
Financial News Highlights
-
- The U.S. economy added a whopping 528k jobs in July, pushing employment above its pre-pandemic level. The unemployment rate also ticked lower, falling back to its pre-pandemic historical low of 3.5%.
- Sentiment indicators also surprised to the upside, with the manufacturing sector faring better than expected and the services sector pointing to plenty of pent-up demand.
- Data out this week support the narrative that the U.S. economy is not currently in a recession, and more monetary tightening will be required from the FOMC to slow inflation and restore balance in the labor market.
U.S. More Fuel to the Recession Debate
This week in financial news, the debate on whether the Fed will be able to achieve a soft landing intensified. Equities were trading up most of the week as investors bought into the positive economic news with an expectation that a slowdown in economic growth will avoid a severe downturn. In contrast, the bond market took a grimmer view of the future, by pushing the 10Y2Y yield inversion deeper into negative territory, suggesting a recession may be looming on the horizon.
Investors weren’t the only ones arguing about the economic prospects. In academic circles, the debate on whether a soft landing can be achieved was out in the open. At its core is the argument that job vacancies can’t decline by a large amount without the economy falling into recession. This week’s release of June’s Job Openings and Labor Turnover Survey (JOLTS) showed that job openings dipped to 10.7 million while job vacancy rate continued to decline, indicating we have likely already surpassed peak tightness in the labor market. Still, demand for workers continued to outpace supply - a sign of a still strong labor market.
Indeed, anyone in search of more signs that the economy is in fact not in a recession need to look no further than today’s jobs report. July data shows that the economy added a whopping 528k jobs (well above the consensus forecast of 250k), while revisions resulted in additional 28k jobs – enough for the payroll figures to surpass their pre-pandemic level (Chart 1). The unemployment rate declined by a tenth of a percentage point to 3.5%, while the labor force participation rate fell slightly to 62.1%. Furthermore, average hourly earnings accelerated – not quite what the Fed was looking for as this increases the possibility of inflation becoming entrenched.
Meanwhile, sentiment indicators also surprised to the upside in financial news. The Institute for Supply Managements’ (ISM) readings for the manufacturing sector slipped modestly but came in above expectation. Demand is clearly slowing with new orders contracting for the second month in a row. Still, this comes with less pressure on suppliers, as supplier delivery times rose at their slowest pace since before the pandemic. Moreover, the inventories subindex continues to show improvement. This corresponds with rising auto inventories, where increased production helped improve market supply to roughly 28 days from February’s low of just 24 days.
The ISM services index pointed to a broad pickup in services activity, proving again that there is still plenty of pent-up demand. The gap between the supplier deliveries time and the rest of the index’s drivers narrowed in July – a month after a similar improvement in the manufacturing sector. This seems to have contributed to a decline in the prices paid component in both sectors of the economy (Chart 2). The sizeable deceleration in the ISM price subindexes may very well be a harbinger of a slowing pace in broader price growth, which we’ll hopefully see in next week’s CPI report.
Still, at the 40-year high price growth is too overwhelming for the Fed to scale back on rate hikes. For now, robust employment growth adds further conviction that the economy remains on a solid footing and suggests the FOMC needs to remain aggressive in tightening rates to help cool inflation and re-anchor inflation expectations.
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.
To see more news reports, click here.
Financial News for the Week of July 29th, 2022
Financial News Highlights
-
Highlights
- Real GDP declined for the second consecutive quarter in Q2, meeting one (narrow) criteria of a recession.
- The Federal Reserve delivered another supersized rate hike of 75bps this week, bringing the upper bound of the policy rate to 2.5%. Chair Powell emphasized the need to take rates higher but neglected to give any forward guidance.
- The energy shock due to Russia’s war in Ukraine that is fueling much of the region’s inflation is also increasingly likely to profoundly restrict growth.
- For the European Central Bank, this represents the worst-case scenario, as it could soon be faced with the prospect of raising rates to preserve longer-term stability despite an output contraction.
U.S. Technically Not There (Yet)
The dreaded “R” word (recession) isn’t one economist’s use lightly. This is why so much focus was placed on this week’s advance estimate of Q2 GDP and the FOMC meeting in financial news.
According to Bureau of Economic Analysis, real GDP declined 0.9% q/q (annualized) in Q2 – well below the consensus forecast of a modest 0.4% gain (Chart 1). More significant than the headline print was that activity has now declined in each of the last two consecutive quarters – meeting one (narrow) criteria of a “technical” recession. At this point, most economists would agree that the US economy isn’t (yet) in recession. The National Bureau of Economic Research (NBER), who is tasked with dating business cycles, would also agree. Outside of just economic growth, the NBER considers a host of other indicators including measures of production, employment, and income. At present, most of these measures continue to point to an economy that remains in expansionary territory.
That said, domestic demand has shown a clear sign of slowing. Consumer spending decelerated to just 1% in the second quarter, while fixed investment declined by 3.9%. At this point, it doesn’t appear that growth prospects will be improving anytime soon. Measures of both consumer and business sentiment have turned decisively lower in recent months, and this is showing in the monthly consumer spending data (Chart 2). After adjusting for inflation, real consumer spending was up just 0.1% m/m in June – a rebound from May’s 0.3% decline – but nonetheless a weak handoff into Q3.
The FOMC acknowledged the recent softening in economic data in the very first sentence of its July statement. But that didn’t stop them from raising rates by another 75bps. At 2.5%, the policy rate is now in the vicinity of the FOMC’s assessment of neutral – the interest rate that’s neither accommodative nor restrictive. However, Chair Powell was explicit in the press conference that the Committee intends to raise the policy rate well into “restrictive” territory in order to return price stability. Powell was careful in his word choice, admitting that doing so will lead to some slowing in growth and a rise in the unemployment rate, but skirted any explicit reference to recession. Just how far above neutral the FOMC will have to go remains dependent on how the economy responds to past hikes between now and September.Perhaps the most noteworthy takeaway from Powell’s entire press conference came from what he neglected to say. In contrast to more recent briefings, the Chair failed to give explicit forward guidance on the expected changes to the policy rate at its next meeting in major financial news. Instead, he emphasized the need to “just go to a meeting-by-meeting basis”, suggesting the size of future hikes will be entirely data dependent. From that perspective, the July/August CPI and employment reports will be under the microscope. However, the Q2 release of the employment cost index will also catch the FOMC’s eye. The index adjusts for the composition of jobs, providing the cleanest snapshot of overall employee earnings. It showed that growth in employment compensation remained elevated in Q2 – growing 5.4% (annualized). From a scoring perspective, this favors another big move in September. Let’s see what employment brings next Friday!
Thomas Feltmate, Director | 416-944-5730
The European Dilemma
The European Central Bank (ECB) is facing a daunting outlook. The energy shock due to Russia's war in Ukraine that is fueling much of the region's inflation is also increasingly likely to profoundly restrict growth in financial news. As near-term indicators are signaling that a recession may soon begin, the ECB has committed to a "meeting-to-meeting" basis for rate decisions that could force them to raise rates into a recession.
Near-term tracking measures have started to show a steep deceleration, or outright contractions, in economic activity in the euro area. July's flash PMI readings for the euro area reflected a decline in output, with much of the pain being felt in its industrial engine – Germany. The EuroCOIN and Ita-COIN indicators are also showing growth having topped out and starting to fall.
Looking forward, it is the ongoing lift to energy prices that is most concerning. Recession fears have helped crude oil prices off their highs, but supply concerns have supported a high floor under prices. Moreover, if Russia halts natural gas flows to Europe, it risks creating an outright shortage in the coming months, further raising inflation and reducing output. Thus far the energy shock is responsible for roughly half (Chart 1) of the inflationary impulse in the euro zone.
A full stoppage of gas flows would lead to substantial demand destruction and a host of literature on potential losses has emerged in the past months. IMF researchi suggests E.U. output losses could range between -2.7%, in the worst-case scenario and -0.4% if the E.U. were able to fully integrate into the global LNG market.
To counteract the risks, the European Commission has asked for a voluntary 15% reduction in natural gas usage across the EU (with some exceptions). These voluntary cutbacks could go a long way to limit the economic fallout from a gas shortage. IMF estimatesii for Germany suggest that by strategically rationing gas, the direct GDP loss in the first six months of the shock could be reduced from 0.9% to 0.2%.Beyond the direct effects, consumer confidence is tumbling (Chart 2). Falls this large typically drive up precautionary savings. Meanwhile, business confidence, having remained relatively resilient through June is starting to weaken notably.
The ECB supported its decision to raise interest rates by 50 basis points by emphasizing the need to temper inflation expectations and the introduction of a new bond-buying tool to help monetary policy transmission. However, higher energy prices are fueling an inflationary feedback loop, and it may soon be faced with the prospect of raising rates to preserve longer-term stability despite an output contraction.
Andrew Hencic, Senior Economist | 416-944-5307
The dreaded “R” word (recession) isn’t one economist’s use lightly. This is why so much focus was placed on this week’s advance estimate of Q2 GDP and the FOMC meeting in financial news.
The FOMC acknowledged the recent softening in economic data in the very first sentence of its July statement. But that didn’t stop them from raising rates by another 75bps. At 2.5%, the policy rate is now in the vicinity of the FOMC’s assessment of neutral – the interest rate that’s neither accommodative nor restrictive. However, Chair Powell was explicit in the press conference that the Committee intends to raise the policy rate well into “restrictive” territory in order to return price stability. Powell was careful in his word choice, admitting that doing so will lead to some slowing in growth and a rise in the unemployment rate, but skirted any explicit reference to recession. Just how far above neutral the FOMC will have to go remains dependent on how the economy responds to past hikes between now and September.
The European Central Bank (ECB) is facing a daunting outlook. The energy shock due to Russia's war in Ukraine that is fueling much of the region's inflation is also increasingly likely to profoundly restrict growth in financial news. As near-term indicators are signaling that a recession may soon begin, the ECB has committed to a "meeting-to-meeting" basis for rate decisions that could force them to raise rates into a recession.
To counteract the risks, the European Commission has asked for a voluntary 15% reduction in natural gas usage across the EU (with some exceptions). These voluntary cutbacks could go a long way to limit the economic fallout from a gas shortage. IMF estimatesii for Germany suggest that by strategically rationing gas, the direct GDP loss in the first six months of the shock could be reduced from 0.9% to 0.2%.
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.
To see more news reports, click here.
Financial News for the Week of July 22nd, 2022
Financial News Highlights
- June’s housing data showed another decline in activity as the effects of higher mortgage rates and stretched affordability impact the market.
- A strong labor market and tight inventories will support housing construction and limit the downside risks.
- Despite the slowdown in the housing market the Fed will keep up its fight against inflation with another 75-basis point hike next week.
U.S.-Softening Housing Market Won’t Deter Fed
This week’s housing data showed that the market continued to slow meaningfully through June in financial news. Yet, as inflation continues to linger at multi-decade highs the Fed will keep up the fight against rising prices by raising rates another 75-basis points (bps) next week. Fortunately for the housing market a strong labor market and tight inventories will support construction and limit the possibility of a rapid deterioration of conditions.
On Tuesday the Census Bureau released June data on national housing starts. Overall, starts pulled back 32k units to 1,559k (annualized) in June, touching their lowest reading since last September. However, the entirety of the decline was attributable to weakness in the single-detached segment (-86k) as multifamily construction rose another 54k. The multifamily starts registered 577k units, and apart from April’s 632k and January 2020’s 601k, this is the strongest reading since the late 1980s. Permitting activity pulled back as well, falling 10k to 1,685k (annualized). Again, the multifamily segment showed ongoing strength, with permits rising 74k, while the single-family segment pulled back 84k.
Looking forward, there still looks to be healthy support for construction in the coming months. The pipeline of projects (as measured by units authorized but not started), is at a multi-decade high with a near even split between multi-unit and single-family structures waiting to get shovels in the ground (Chart 1) in further financial news. As raw materials prices come down, and supply chain issues gradually fade, the opportunity for more projects to get underway increases.
Indeed, more construction will be needed as this week’s existing home sales data showed there was roughly 3.0 months’ worth of inventory in the market – still below what is a balanced market. That said, amid falling affordability sales are slowing markedly. June’s existing home sales data reflect just that as sales fell to 5.1 million units (annualized) – the lowest reading since June 2020 (Chart 2). The slowdown in sales activity helped push the seasonally adjusted median sales price down 0.2% on a month-over-month basis. However, affordability continues to be stretched, particularly for the single-family segment. Combined with elevated mortgage rates this should continue to cool housing sales in the coming months.
Given the exuberance in the housing market over the past two years, the Fed’s mandate to fight inflation, and the strains on affordability, the slowdown in the housing market was expected. Indeed, residential investment is likely to contract well into 2023. That said, the moderation is simply helping bring the economy back to a pre-pandemic composition.
Despite the slowdown in the housing market the Fed will keep up its fight against inflation with another 75-basis point hike next week. The unemployment rate is still holding at 3.6%, while last week’s CPI print showed inflation hit 9% year-over-year in June. A strong labor market and inflation far from target means policymakers will continue working hard to keep inflation expectations anchored and bring down the pace of price gains.
Andrew Hencic, Senior Economist | 416-944-5307
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
To see more news reports, click here.
Financial News for the Week of July 15th, 2022
Financial News Highlights
- Market sentiment soured this week on stronger than expected CPI data and a weak start to corporate earnings season.
- US CPI accelerated in June, rising 1.3% m/m, pushing the year-ago measure to a new multidecade high of 9.1%. Core inflation accelerated by 0.7% m/m, as hefty gains were seen across both goods (0.8% m/m) and service (0.7% m/m) categories.
- June retail sales surprised to upside, with both the headline (1% m/m) and control measure (0.8% m/m) recording decent nominal gains. However, sales were lower after adjusting for inflation.
U.S.-Gotta Bend Before You Can Break
Market sentiment decisively shifted to risk-off mode this week, as a stronger than expected print on CPI and a weak start to corporate earnings season helped cast further doubt on the economic outlook in financial news. At the time of writing, the S&P 500 is down 2% on the week and has now had one of the worst starts to a year in nearly a century. The deteriorating market sentiment led to a further widening in the yield curve inversion – highlighting the growing fear among market participants that a recession may be on the horizon. The 10Y-2Y spread now sits at -20 basis points (bps). The sour market sentiment also spilled over to commodity markets, with WTI down 8% to $98 per-barrel on the week.
Any hopes of inflationary pressures easing in June were quickly dashed on Wednesday following the Bureau of Labor Statistics’ release of last month’s CPI data. Headline CPI accelerated by 1.3% month-on-month (m/m), pushing the year-ago measure to a new multidecade high of 9.1%. Indeed, with fuel prices having surged by 11% last month, and more recent gains in food prices showing incredible persistence, a further acceleration in the headline measure was inevitable. What was not anticipated, however, was the uptick in core inflation (0.7% m/m). Perhaps most disconcerting was the breadth in price gains across core, particularly among goods categories (Chart 1). Further gains in goods prices are at odds with more recent spending data, which has shown consumers pulling back on purchases of most discretionary goods in recent months. While inflation is notoriously a lagged indicator, it was thought that the combination of weakening demand and anecdotal reports of retailers carrying excess inventory would soon start to exert downward pressure on goods prices. That narrative has yet to come to fruition, and that detail will not be lost on policymakers when they meet later this month.
Perhaps one piece of encouraging news came from the July reading of the University of Michigan consumer confidence survey, which showed that expectations for inflation over the next five years now sit at 2.8% – down from last month’s reading of 3.1% (Chart 2). Chair Powell highlighted the recent upward drift in inflation expectations as being one of the key contributors in the FOMC’s decision to raise rates more forcefully in June. While the turn lower will provide some relief to policymakers, it won’t be enough to dissuade them from pushing ahead with another supersized hike later this month. This sentiment has been mirrored in market pricing, with odds a near coin toss on whether the Fed will raise by 75bps or 100bps.
The big question now is to what extent higher interest rates will ultimately weigh on domestic demand in financial news. Retail sales data for June showed that consumers are remaining somewhat resilient, with both headline (1.0% m/m) and the control (0.8% m/m) up on the month. That said, consumer spending is only tracking around 1% q/q (annualized) for the second quarter, which is a marked slowdown from the 4.5% averaged through the second half of last year. With inflation continuing to erode purchasing power and rates expected to move decisively higher through year-end, the hope is that consumers will only bend under the weight of the dual-income shock and not completely break.
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.
To see more news reports, click here.
Featured Article: The Ingredients For A Happy Retirement
The Ingredients For A Happy Retirement
What are the ingredients for a happy retirement? (Photo by Bryn Colton)
What’s the difference between a happy retirement, and a not-so-happy retirement? Financial planners have the unique perspective of seeing many clients retire over time, and as such they can differentiate what creates a happy retirement for most people. While what makes someone happy is always subjective, there are some generalities that play out across many successful retirees.
Planning
While good planning doesn’t guarantee a happy retirement, it might help you to feel more prepared for retirement. Planning ahead, both financially and emotionally for a big change in your life can help you to deal with the stress of the upcoming change, leading to an easier transition.
Mindset
Retirees that seem the happiest are those retiring to something and not from something. If you’re retiring just to escape a work situation you don’t like, or because it feels like that is what you have to do, your retirement situation might be less than idea. If you’re retiring because you’re ready to put work aside and travel or spend more time with your family, you’re likely to have a better outcome in retirement and feel happier and more fulfilled. Having the right mindset and attitude is great first step in embracing retirement and ultimately, in feeling happier throughout your retirement years.
Surrounding Yourself With Loved Ones
Surrounding yourself with those that you love seems like an optimal way to have a happier retirement. Many retirees choose to spend more time with their families, but don’t discount the extra time that you might have to spend with your friends. You could also spend this time making new friends and broadening your social circle. Spending time with people you care about is one way to improve your mood, particularly during retirement when you have the extra time to devote to your social life.
Relaxation
Happy retirees balance out the fun things that they’re doing with additional rest and relaxation. After a long span of working, a bit of relaxation is natural, and finding out the rhythm that best fits your new lifestyle will result in your own happiness. Some retirees prefer to sleep in, or nap during the day, whereas another retiree may prefer to wake up early and use mindful meditate to relax. Whatever relaxation methods work best for you, incorporating additional rest and relaxation time into your retirement schedule may increase your happiness during these years.
Travel
Retirees and travel go hand in hand, and it can be a great way to spend your time during your retirement years. Seeing new places and experiencing new cultures can cause great happiness for some people, while others may prefer to stay home and travel within their own city or state. From weekend trips, to cruises, RV excursions or sailing, there’s plenty to experience in the world and exploring it with a renewed sense of adventure may bring you great happiness.
Prioritizing Health
Without prioritizing health, retirement may not last as long as you’d like. Putting your own health at the forefront, with exercise, healthy eating, and whatever stress reducing activities area meaningful to you, may not only improve your mood and happiness, but improve your life in general during retirement.
Giving Back
Giving back to others, either through volunteering, charity, or mentoring, can be an immensely positive experience that can bring great joy for retirees. Often, retirees may have wanted to spend time volunteering or mentoring during their career but haven’t had the time, and this time of life is an ideal time to get started. Helping others can certainly improve your own level of happiness.
Do More Of What You Love
Retirement is all about you, and doing what you love. So naturally, now is the time to do more of it. If fishing is your thing, and that is what brings you happiness, then spend more time fishing. If you’re a gardener, spend more time in the garden. Lean into what brings you happiness, especially during retirement.
To see more fantastic articles like this one, please see here.
Financial News for the Week of July 8th, 2022
Financial News Highlights
- Recession calls increased this week, but the job market begged to differ. The U.S. added 372k jobs in June, keeping the unemployment rate at its historic low of 3.6% and amplifying fears about inflation.
- In contrast, leading business indicators slipped modestly in June, while remaining above the 50 threshold, which suggests that both manufacturing and services sectors continue to expand.
- The FOMC minutes from the June meeting showed significant worries about the possibility that high inflation is becoming entrenched in consumer expectations. The Fed is positioned for another supersized rate hike at the end of the month.
U.S.-Job Gains Defy Recession Calls
Recession became a much more popular word on the street this week in financial news. Revisions to first quarter GDP data and a weak spending report for May which came out at the end of last week revealed much softer consumer momentum in the first half of the year. This led many forecasters to downgrade their outlooks, with some calling for recession. TD Economics is not calling for a recession, but we acknowledge the downside risks have risen. As such, we have formulated an alternate economic profile on how a U.S. recession might unfold.
The Atlanta Fed’s GDP Nowcast is pointing to a second quarter of contraction in GDP in Q2 (Chart 1). However, two quarters of contraction in GDP is not enough to qualify as a recession according to NBER criteria – the economic body that defines recessions. In addition to economic output, it places a heavy importance on payrolls employment and real personal incomes less transfers. The income measure has certainly softened with high inflation in recent months but remains in expansionary territory. And the impressive June payrolls report confirmed that employment remained strong (Chart 2). The unemployment rate remained low at 3.6%, and average hourly wages were up a healthy 5.1% year-on-year, both pointing to tight labor market conditions.
Putting aside healthy hiring through June, sentiment indicators are showing some softness. The Institute for Supply Managements’ (ISM) readings for the manufacturing and services sectors both slipped modestly. However, both sectors remained above the 50 threshold, which suggests that both remained in expansionary territory. The underlying details paint a slightly more nuanced picture. Both sectors showed an increase in current business activity, but in the manufacturing sector, the new orders index slipped into contractionary territory, while in the services sector it eased but remained solidly expansionary.
Another important message of the ISM reports is that prices paid by businesses continue to ease – a trend that corresponds with a recent reduction in supply chain bottlenecks. Indeed, the supplier delivery times have improved since the beginning of the year, especially in the manufacturing sector. According to the San Francisco Fed’s research, the distribution of price gains as measured by core PCE inflation is equally split between supply and demand factors, suggesting that cooling on the supply side should help ease inflation going forward.
In the meantime, minutes from the FOMC meeting in June showed that members are worried about the level of stickiness in price gains, and the rising possibility that high inflation is becoming entrenched in consumers expectations. This fear clearly overshadowed any concern the members might have had about prospects for economic growth, resulting in a rare consensus when deciding to supersize the rate hike to 75 basis points. The Fed is positioned for another supersized rate hike at the end of the month, as it focuses on tempering demand.
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.
To see more news reports, click here.
Financial News for the Week of July 1st, 2022
Financial News Highlights
- Real personal consumption expenditures contracted in May, as consumers continue to tap excess savings.
- Indeed, in another sign that demand may be softening, core PCE inflation (that excludes food and energy) declined again to +4.7% year-over-year (y/y). Headline inflation (+6.4% y/y) continues to be supported by rising food and energy costs.
- The coming year will certainly pose economic challenges for emerging markets. However, there is still ample slack to be made up after the past two pandemic years that will provide a fillip to growth for many countries.
- Three shocks are the main drivers of the lower outlook for EMs: the spring lockdowns in China, the war in Ukraine, and the sanctions on the Russian economy.
U.S. -Consumers Cut Back As Prices at the Pump Surge
Cracks are starting to show in the U.S. economy in financial news. First quarter growth disappointed as the economy contracted for the three months to March. Despite the negative print, there was still reason to be optimistic given resilient consumer demand. Unfortunately, this fillip to growth is quickly fading.
The final release of the first quarter data this week showed that consumer spending was much weaker than realized at first blush. Personal consumption expenditures rose 1.8% (at a seasonally adjusted annual rate) in the first quarter, notably less than the 3.1% expansion reported in the prior release. Consumer services spending was notably weaker, having been marked down by 1.8 percentage points to 3.0%. Durables spending also registered a more tepid expansion of 5.9% relative to the 6.8% previously reported.
Most have expected that goods demand was set to lag as the economy reopened and people were able to travel, go out, and engage with the services sector. So, what is particularly worrisome about the report is the tepid growth in services demand. Indeed, May’s personal income and spending report looks like it reflects an extension of this trend. On a nominal basis spending registered + 0.2% month-over-month (m/m) but, with inflation at multi-decade highs, after price effects were stripped out the real consumption expenditures contracted 0.4% for the month. Worryingly, April’s growth was revised downward to 0.3% m/m from 0.7% prior.
Ultimately this is coming about as the anticipated growth in services spending is not materializing to the extent required to offset the slowdown in goods spending (Chart 1). In May, real services expenditures grew by 0.3% (m/m) but were nowhere near enough to offset the 1.6% m/m contraction in goods purchases in financial news.
Indeed, in another sign that demand may be softening, core PCE inflation (that excludes food and energy) declined again to +4.7% year-over-year (y/y), after peaking at 5.3% in February. Unfortunately, headline inflation (6.4%) picked up and was underpinned by surging food prices and energy goods and services prices, which were up 11.0% and 35.8 % year-over-year respectively. The ongoing surge in the cost-of-living may already be forcing households to make tough choices on what to buy and what to forego, or at least rethink some discretionary purchases.
Going forward, the concern is that consumer sentiment continues to fall as inflation and rising interest rates dent disposable incomes and talk of recession raises anxieties. In June, the Conference Board’s measure of consumer confidence reached its lowest level since February 2021. The main culprit being the sustained decline in consumer expectations (Chart 2).
Households are facing a historic cost-of-living crunch. Moreover, given the broader context of high inflation, sagging consumer confidence, and a Fed that remains steadfast in tightening monetary conditions until inflation abates, consumer spending faces a slew of headwinds in the coming months.
Andrew Hencic, Senior Economist | 416-944-5307
Global- Emerging Market Outlook Dims
The skyrocketing food prices and interest rate hikes in advanced economies have raised bad memories of past stumbling blocks for emerging market (EM) economies. The coming year will certainly pose economic challenges, but there is still ample slack to be made up after the past two pandemic years that will provide a fillip to growth for many countries.
We have highlighted the risks to the outlook in our recent Quarterly Economic Forecast (link) and Question and Answer (link) publications. Broadly speaking, tighter financial conditions, slowing growth in advanced economies, the knock-on effects from the war in Ukraine, and China's commitment to Zero-COVID will all weigh on demand. Our outlook for emerging markets has been marked down to 3.2% in 2022 (from over 4% in our March outlook).
Three shocks are the main drivers of the lower outlook for EMs: the spring lockdowns in China, the war in Ukraine, and the sanctions on the Russian economy (Chart 1). Beyond that, the global economic landscape is shifting as growth in advanced economies slows – with anticipated knock-on effects for the rest of the world.
The war in Ukraine has kicked off another surge higher in energy prices. For most, higher energy prices act as a tax on households, eroding disposable incomes. Moreover, rising prices of key commodities (accompanied by the recent surge in the U.S. dollar) materially raise input costs for firms in import reliant markets.
Food expenditures also make up a much larger share of the household expenditure basket in less developed nations than in advanced economies (Chart 2). Higher food prices will be reflected in more severe inflation, that indicates a rapid erosion in living standards and leaves less money available to purchase other goods and services.
The increasingly downbeat outlook for China and the U.S. will bleed into total global demand. The two countries accounted for 13.9% and 8.5% of global merchandise imports, respectively, in 2019 and any slowdown in activity will trickle down through supply chains.
Financial conditions have also tightened as monetary authorities have been raising interest rates since 2021, in an effort to combat domestic inflation and stave off capital flight. As higher costs of capital feed through to the economy, the challenging conditions will leave vulnerable firms looking to secure liquidity.
Despite the landscape for emerging markets growing increasingly challenging in 2022 there is room for optimism as services spending resumes. Thailand, for example, saw tourist arrivals plummet from nearly four million in December 2019 to 520 thousand in May 2022. Moreover, if advanced economies execute a soft landing, the risks associated with a rapid tightening of financial conditions can be avoided.
Andrew Hencic, Senior Economist | 416-944-5307
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
To see more news reports, click here.
Featured Article: To Find the Wines of Summer, Just Say Quaffable
Featured Article: To Find the Wines of Summer, Just Say Quaffable
Terms like ‘refreshing,’ ‘easy drinking,’ ‘crisp’ and ‘light’ have all been offered as synonyms. Our wine columnist dove deep into the category and came up with 5 categorically quaffable wines (also great values) to drink right now.
By
What does “quaffable” mean? When I went in search of a quaffable wine recently at Bogey’s Bottled Goods in Southold, N.Y., partner Zach Glassman met my request with a raised eyebrow. “ ‘Quaffing’ is such a fun word,” he said. “You don’t often hear such eloquence on Long Island!”
As a one-time resident of Long Island, I took the tiniest umbrage at Mr. Glassman’s response, but I understood what he meant. I love the words quaffing and quaffable. They are fun and capture the character of summer; to me, a quaffer is a wine that does the same. But while I’ve always found these to be useful descriptors, not everyone seems to agree. Often, retailers will translate “quaffable” to terms like “easy drinking” and “refreshing.”
Danny Roosevelt, head of purchasing at Parcelle Wine in New York City, told me he doesn’t consider “quaffer” a “customer-facing word.” In his view, it isn’t “universally meaningful.” Mr. Roosevelt might recommend a “light, refreshing red” or “crisp, salty white,” both of which he considers synonymous with quaffer.
He sent me his list of quaffing wines, red and white, from all over the world. One of his favorites is one of mine too: the 2020 Tiberio Trebbiano d’Abruzzo ($16). I already had a couple bottles at home, and I brought one to dinner at Divina Ristorante, my friend Mario Carlino’s (BYO) restaurant in Caldwell, N.J. “Quaffable?” Mario repeated when I described the wine. The native of Calabria, Italy, shook his head. I poured Mario a glass. He liked the wine but had his own words to describe it. “This is vinello leggero,” he said. Translation: light wine. It meant he considered the wine pleasantly drinkable, if somewhat cheap.
When I emailed Jason Jacobeit, co-proprietor of Somm Cellars in New York, to ask for his picks, he suggested a couple of village Chablis that “went down easy” and were “vividly fresh.” Two of his favorite producers, Charlène Pinson and Bernard Defaix, were priced a bit higher ($30 and $36, respectively) than my own favorite quaffing Chablis: the 2020 Gilbert Picq & ses Fils Chablis ($20), a fresh, lively and eminently drinkable wine from a producer who is also quite good, if somewhat underrated.
While Mr. Jacobeit’s fiscal sweet spot for quaffers was a bit higher than mine, Donna Garvey’s was more closely aligned. Ms. Garvey, a salesperson at Gary’s Wine & Marketplace in Wayne, N.J., does use the q-word when talking to customers, and she believes a quaffable wine shouldn’t cost more than $15. It should also be “universally likable” and taste good with or without food, in her view. I bought a couple of Ms. Garvey’s favorites and particularly liked her pick of the Gruet Brut Rosé ($15), a sparkling wine from New Mexico made mostly from Pinot Noir. A red berry-fruited Champagne-method wine, it’s a slightly frothy, just-dry-enough pink sparkler that is indeed suitable for drinking alone or pairing with food.
While the Gruet has broad distribution, some other $15 quaffers I tasted are a bit harder to find—but worth it. The 2021 Alkoomi Rosé ($12), from the Frankland River region in Western Australia, was dry yet wonderfully juicy. The 2020 Domaine de la Rosière Jongieux Blanc ($15), a white wine made in the Alpine Savoy region of France from the Jacquère grape, was pure mountain crispness.
While $15 is about as low as I typically go with a quaffer, Mr. Glassman at Bogey’s suggested an even cheaper wine: the 2021 Thresher Sauvignon Blanc ($10), from Chile. Marked by a pleasing sweet-tart flavor, it was mouthwateringly crisp and happily devoid of the herbaceous green notes that sometimes mar a cheap Sauvignon. It was so light-bodied it was better as an aperitif than as a food wine.
My friend Sue liked the Thresher Sauvignon Blanc for this very reason. “It’s a lot like water,” she said (something the Thresher winemaking team might not like to hear). She had her reservations about the word quaffer, however. “It sounds very King Henry the 8th,” said Sue, who is English herself and happened to be spot-on historically. An online etymology source I consulted said “quaff” dates back to the 16th century and originally meant “to drink or swallow in large draughts.”
Sue and I didn’t drink large draughts of any one quaffer, but we did try several, including reds from countries around the world. I don’t often think of red wines as quaffers—save, perhaps, for Lambrusco. The Lini 910 Labrusca Lambrusco Rosso ($18) from Emilia-Romagna is one of my summertime go-tos. Low in alcohol (11%), fruity but dry, it’s fizzy enough to be refreshing and substantial enough for food. I love it with barbecue.
A good quaffing wine isn’t the cheapest wine but rather a modest wine, well-made, from a good producer.
A couple of the reds recommended to me were a bit too much in terms of alcohol or tannins or oak to qualify as quaffable in my book. They just didn’t go down easily enough. A couple that did were produced from fairly obscure grapes. The soft and fruity 2020 Las Liebres Colonia Bonarda ($15) from Mendoza, Argentina, is made from the Bonarda grape (Mendoza’s other red grape besides Malbec). The 2020 Les Athlètes du Vin Grolleau ($20), a Loire Valley red made from the Grolleau grape, didn’t look much like a quaffer. The deep purple color suggested something tannic. But on the palate the wine was juicy and bright, and there was just a touch of earthiness behind the red-cherry fruit. And it was also low in alcohol (12.5%).
Another quaffing favorite came from the Rheinhessen region of Germany and the talented winemaker Florian Fauth. The 2020 Seehof Weissburgunder Trocken ($25), his most “basic” dry Pinot Blanc, is a wonderfully snappy white with an intense, even tangy mineral edge.
In the end, a fairly wide range of wines in our tasting qualified as what I’d define as quaffable. So how might you identify one when ordering in a restaurant? My friend Alan had an interesting answer. “They’re not at the bottom of the wine list,” he said. “They’re the next level up.”
That’s exactly it. A good quaffing wine isn’t the cheapest wine but rather a modest wine, well-made, from a good producer. Alan elaborated, and I couldn’t have said it better: “A quaffing wine is one you don’t really talk about, but you smile while you drink it.”
To see more fantastic articles like this one, please see here.