Financial News for the Week of April 22nd, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- US yields continued to move higher this week, as Fed Chair Jerome Powell solidified the case for a 50-basis point rate hike at the Fed’s next meeting on May 4th. He also left the door open to additional 50 bps hikes at subsequent meetings, citing the importance of “front-loading” the removal of monetary accommodation.
- Existing home sales declined by 2.7% m/m to 5.77M (annualized) units in March, while housing starts surprised to the upside, rising by 0.3% m/m to 1.79M (annualized) units.
- The IMF has revised global growth projections lower as the ongoing war in Ukraine and COVID containment efforts in China dim economic prospects.
- Supply chains challenges continue to strain production due to an ongoing scarcity of inputs and rapidly rising costs.
U.S. -Appreciating the Fed Speak
Bond yields across the curve continued to move higher this week, as Fed officials have signaled a growing desire to move quickly in raising rates to quell inflation in financial news. This theme has been playing out across global financial markets since the beginning of the year and was echoed by Fed Chair Jerome Powell earlier this week. Speaking at an IMF event, Powell highlighted the importance of “front-loading” the removal of monetary accommodation, solidifying the case for a 50 basis-point rate hike.
The combination of firming rate hike expectations and heightened geopolitical tensions have led to a meaningful appreciation in the US dollar vis-à-vis other majors. Since the beginning of the year, the dollar index has appreciated by over 5%. It currently sits at a level not seen since the onset of the pandemic when heighten uncertainty drove significant safe haven flows into the US. With that in mind, it doesn’t seem like the dollar has much further to run. Longer-term yields are quickly closing in on peak levels not seen since the end of the last tightening cycle, and markets are already fully priced for an additional 200 basis points (bps) of tightening from the Fed this year alone. This is 25 bps higher than the FOMC’s median projection for the fed funds rate, suggesting there’s still some wiggle room for the Fed to adjust its outlook higher without meaningful moving the market. The wildcard remains on the geopolitical front. Further escalations in geopolitical tensions will only drive stronger demand for safe-haven investments, which would ultimately be dollar positive.
On the real economy, we’ve already started to see the impact of higher rates on some interest rate sensitive sectors. Existing home sales declined by 2.7% m/m in March – falling for the second consecutive month – to 5.77M units (Chart 1). However, higher rates aren’t telling the full story. Sales have also been restrained by exceptionally tight inventory, which currently sits at just a 2 months’ supply. For context, a balanced market typically runs anywhere between 4-6 months’ supply. While we are a long way from those levels, housing construction continues to surprise to the upside.
March housing starts rose by 0.3% month-on-month (m/m) to 1.79M (SAAR) units, marking yet another new cyclical high. Over the near-term, it would appear that starts have more room to run. The 3-month moving average of housing permits – a leading indicator for construction – continues to run well above the current level of starts, suggesting there is still plenty of projects in the pipeline.
The sustained strength in housing construction provides evidence that at least some of the headwinds that builders had faced earlier in the pandemic are starting to abate. Also in financial news, while sourcing of some materials remains an issue, labor constraints appear to be easing. Over the last year, the construction sector has added more than 200k jobs, and has now completely recouped all of its pandemic related losses. Interestingly, gains have not been spread evenly across the sector. Hiring in residential construction is 5.5% above February 2020 levels, while non-residential construction still has yet to recover from the pandemic. The shifting in employment composition shows that trades workers are going where the jobs are most plentiful, which bodes well for continued strength in residential construction, and should provide some relief to the supply constrained housing market.
Thomas Feltmate, Director | 647-983-5499
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 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.
Financial News for the Week of April 15th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Overall inflation as measured by the CPI accelerated to 8.5% year-over-year (y/y) in March, marking yet another multi-decade high. Core inflation, which excludes food and energy, ticked up a tenth of a percentage point to 6.5% y/y.
- Small business confidence continued to trend lower in March as the share of businesses expecting an improvement in the economy fell to an all-time low. Meanwhile, inflation has vaulted into being perceived as the top business problem.
- Retail sales rose 0.5% month-to-month (m/m) in March - broadly in line with market expectations. Excluding volatile categories, sales in the ‘control group’ (used in calculating personal consumption expenditures) fell 0.1% on the month.
U.S. -Inflation Surge Continues
Inflation remained top of mind this week with the Consumer Price Index (CPI) report reminding us once again that price pressures accelerated in March in financial news. Overall inflation rose both in month-to-month (+1.2% m/m) and year-over-year (y/y) terms, with the latter reaching 8.5% in March – a new multi-decade high. Energy, especially, and food, to a lesser degree, both contributed to the acceleration. Still, even when excluding these more volatile categories, core inflation (up only a tenth of a percentage point to 6.5% y/y) was at the highest level since the early 1980s (Chart 1). Adding to the evidence that price pressures continued to build through March, supplier prices also rose sharply last month, accelerating to 11.2% y/y – an all-time high for the data stretching back to 2010.
Inflation worries were echoed in the National Federation of Independent Business (NFIB) small business report. Business confidence continued to trend lower, falling to 93.2 in March – the lowest level since 2016 excluding the temporary drop at the start of the pandemic. Businesses were the most pessimistic they have ever been regarding an improvement in the economy ahead from current levels (albeit the bar to improve on the post-pandemic rebound pace is very high). Yet perhaps the most striking aspect of the report is the fact that inflation concerns, barely a factor as the start of last year, have risen sharply, overtaking ‘quality of labor’ concerns recently (Chart 2). This shift suggests that managing inflation’s impact is now the top priority, while securing talent amidst a tightening labor market playing an important second fiddle.
Small business job openings remain plentiful, despite trending lower since peaking in September. Meanwhile, businesses continue to raise wages and plan more increases ahead, with both of these sub-indicators in the NFIB survey ticking higher last month. A growing share of businesses are also passing on the added costs to consumers by raising prices. A net 72% are doing so – a record high in the survey’s almost 50-year history. All these factors, together with the potential for more supply-chain disruptions due to the war in Ukraine, and shutdowns in China, suggest that inflation will continue to run hot in the near-term.
Tilting to retail sales, a 0.5% gain in March and a bulky upgrade to the month prior were positive developments. Gains in March also appeared to be skewed toward “going out” categories – a pattern consistent with the reopening of the economy. A sharp drop in non-store sales (a proxy for online sales) further bolsters this point. Digging deeper, however, the picture is less rosy. Sales in the control group, which exclude volatile categories and are used in calculating personal consumption expenditures, were down 0.1% m/m. Meanwhile, when adjusting headline figures by CPI, the data points a decline in the ‘real’ sales estimate both in monthly and year-on-year terms.
All told, with inflation running hot and still no major cracks in the economic armor, the Fed will need to follow through with the speedy removal of monetary stimulus to try and rein in inflation. Interest-sensitive sectors, such as housing, which is already showing some signs of cooling (see here), are first on the list to feel the pinch from the higher rate environment.
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 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.
Financial News for the Week of April 8th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The first full week of the second quarter was sparse on economic data. The service sector showed signs of modest acceleration, while vehicle sales declined for the second consecutive month in March.
- The Federal Open Market Committee (FOMC) March meeting minutes reiterated members’ unwavering commitment to moving fast to restore price stability.
- The minutes provided a blueprint of the Fed’s balance sheet runoff, which will be more aggressive and ramp up faster than before. At such pace, the runoff should finish by the end of 2024.
U.S. -The Fed’s Most Important Task
The first full week of the second quarter was sparse on economic data in financial news. On Tuesday, the Institute for Supply Management released its report on services that provided signs of modest acceleration in economic activity in the sector. Still, the report was full of contrasting elements. On the one hand, demand indicators were higher with business activity, and both new domestic and export orders up on the month. This was likely supported by stronger employment and the recent improvement in delivery times allowing businesses to rebuild depleted inventories.
On the other hand, the imports sub-index fell into a contractionary territory while ongoing supply chain issued lowered purchasing managers’ inventory sentiment to an all-time low. The prices paid indicator was unsurprisingly higher given the energy shock dealt by the Russia-Ukraine war with all 18 industries reporting higher prices (Chart 1). In addition, respondents’ comments were quite negative, reflecting the pessimism over increasing cost and ongoing supply chain disruption.
This pessimism was echoed in the vehicle sales release, which showed the second consecutive month of decline in March. While underlying demand remains strong and improving, sales will remain constrained by limited inventory. Furthermore, production may suffer another blow should the war in Ukraine result in semiconductor shortages later in this year. As a result of strong demand and tight supply, the inventory-to-sales ratio – a measure of adequacy of supply relative to current demand – remains historically low. This will continue to put upward pressure on car prices over the near-term.
Fighting persistent price pressures remains the Fed’s most important task. The Federal Open Market Committee (FOMC) March meeting minutes reiterated members’’ unwavering commitment to moving fast to restore price stability and reach a neutral policy stance by year end. Many participants expressed their concerns about inflationary risk and voiced their preference to tighten the policy rate by 50 basis points at the next meeting on May 3rd-4th.
The minutes also provided a plan for the Fed’s balance sheet runoff (aka Quantitative Tightening or QT). As we wrote in this report, the monthly caps will be larger than in the previous QT cycle, scaled up by the increase in asset holdings (Chart 2). The participants agreed to shed $60 billion Treasury securities and about $35 billion agency MBS monthly, but the phase-in period will be shorter than we expected at just three months. The runoff may start as early as May, which suggests that the balance sheet could shrink by $2.7 trillion by the end of 2024. By this time, we expect that the Fed will reach $1.7 trillion in reserves – the level of reserves “consistent with the Committee’s ample-reserves operating framework”.
Bond markets reacted by selling longer-dated US Treasury securities, which led to yield-curve steepening. At the time of writing, the 10-year Treasury yield was at 2.69% - up 0.3 percentage points relative to where it closed last week.
Maria Solovieva, CFA, Economist | 416-380-1195
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this 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.
Financial News for the Week of April 1st, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Another solid jobs report showed that the U.S. economy added 431k jobs in March. Wage growth picked up and the unemployment rate fell 0.2 percentage points to 3.6%.
- President Biden presented a $5.8 trillion budget to Congress with a hefty focus on defense spending. Separately, the President also announced releases from the strategic petroleum reserve to combat rising energy prices.
- Nominal consumer spending and income rose in February. Real income, however, pulled back as prices rose rapidly. Inflation, as measured by the year-on-year percent change in the personal consumption price index accelerated to 6.4%.
U.S. -Economic Recovery Battles Inflation Headwinds
On the agenda this week in financial news were several important data releases including consumer income and spending, manufacturing activity, and the March employment report. President Biden also released his budget proposal and announced a plan to release supply from the strategic petroleum reserve in order to combat rising prices.
Jumping right in, nonfarm payrolls expanded by 431k in March with most sectors posting job gains. The only exceptions were transportation & warehousing and utilities. The unemployment rate edged down to 3.6% from 3.8% in February as household employment growth exceeded growth in the labor force (Chart 1). Wages continued to post solid year-on-year growth, ticking up from 5.1% in February to 5.6%. Overall, the report indicates a job market driving full steam ahead, and barring further disruptions, could be back to its pre-pandemic level of employment by the middle of the year.
The ISM Manufacturing Index indicated that factory activity, while still expanding, slowed in March. The index pulled back to 57.1 from 58.6 the month before. There were notable declines in new orders and an increase in prices paid. On the upside, the backlog of orders declined, while the employment index rose.
Turning to the household sector, nominal personal income and spending rose 0.5% and 0.2% respectively in February. An even stronger gain in prices however took a bite out of real disposable income, which declined for the third consecutive month, largely reflecting waning transfers to households. Inflation, meanwhile, continued to accelerate. The personal consumption expenditure (PCE) index rose 6.4% year-over-year (y/y) versus 6.1% in January (Chart 2). The core PCE index also accelerated to 5.4% y/y in February, up from 5.2%. From the Fed’s perspective, inflation is uncomfortably high as supply chains remain stressed, Covid shutdowns in China hamper trade and the Russian-Ukraine war sparks further volatility.
In response to rising energy prices, President Biden plans to release up to 180 million barrels of oil from the strategic reserve over the next six months. While the release may help to alleviate near-term market tightness, the reserve is currently at a 20-year low. Further releases would drive the stockpile even lower, ratcheting up risks surrounding global spare capacity over the longer term.
Finally, President Biden presented his budget proposal for the 2023 fiscal year. The $5.8 trillion budget would raise taxes on billionaires and corporations. A new tax proposal would require households worth more than $100 million to pay a rate of at least 20% on their income as well as a tax on unrealized capital gains on assets such as stocks, bonds, or privately held companies. On the spending side, the budget would increase spending on the military, law enforcement, affordable housing and supply chains, while attempting to reduce the federal deficit by $1 trillion over a decade.
Shernette Mcleod, Economist | 416-415-0413
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this 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.
Financial News for the Week of March 25th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- In a carefully crafted speech this week in D.C., Fed Chair Powell reaffirmed the Fed’s keenness for a more aggressive removal of monetary stimulus in order to restore price stability.
- Powell highlighted the potential for the Fed to go with hikes larger than 25 basis points (bps) if deemed appropriate. Market odds now heavily favor 50 bps hikes at the next two FOMC meetings in May and June.
- On the data front, both new single-family home sales and pending (existing) home sales pulled back in February.
U.S. -Fed’s Focus Tilts Squarely on Restoring Price Stability
If last week’s Fed rate hike (and a sharp move up in the number of future expected hikes among FOMC members) left any doubt about the Fed’s transition to a more hawkish stance, Powell’s remarks this week are likely to have sealed the deal in financial news. There was no shortage of Fed speeches to parse, in a week that didn’t have much in the way of data.
The most noteworthy speech was Fed Chair Powell’s remarks in D.C. on Monday. Reading carefully crafted remarks, Powell recognized that the labor market is strong and still has “substantial momentum”. Further driving home his point, last week’s jobless claims fell to the lowest level since 1969. Powell also noted that inflation is “much too high” and touched on the fallout from the Russia-Ukraine conflict, which will put additional upward price pressure through several key commodities, including crude oil. The price of the latter is up from last week and is holding near $110 per barrel at time of writing – a level that is broadly in line with our recent forecast (see here). Powell also emphasized that the path of inflation remains uncertain. He pointed out the potential for more COVID-related supply chain disruptions out of China, where a rise in Covid infections led to the lockdown of another major city of nine million people this week.
On the monetary policy response, Chair Powell noted that the Fed would not assume significant near-term supply-side relief on inflation but would instead be looking for actual progress on the ground. This was followed by more hawkish comments regarding the size of rate hikes, with the Chair highlighting the potential for the Fed to go with hikes larger than 25 basis points (bps) if deemed appropriate. Powell went further, stating that if the Fed determines the need to “tighten beyond common measures of neutral and into a more restrictive stance”, it will do that as well. This was already shown in the Fed’s updated dot plot, which had a median projected policy rate of 2.8% in 2023-24, above the long-run rate of 2.4%.
Several other Fed officials, including Mester, Daly, and Evans, echoed the hawkish stance by showing more comfort with rate hikes larger than a quarter point. It comes as no surprise then that market odds are now heavily favoring 50 bps hikes at the next two policy meetings (Chart 1). Bond yields and mortgage rates, meanwhile, continued to head higher (Chart 2). Thirty-year mortgage rates rose above 4.5% this week – a sharp increase from a little over 3% at the start of the year. Higher interest rates will take some steam out of housing demand this year, with this week’s declines in new and pending home sales for the month of February not entirely surprising in financial news. Higher borrowing costs are part of the reason why we expect the housing market to cool this year. For more on our housing outlook see here.
The bottom line is that the Fed is behind the curve on inflation, and now needs to take stronger steps to rein it in. While this also increases the chances of policy error, the Fed has reaffirmed its keenness for a more aggressive removal of monetary stimulus to restore price stability.
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 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.
Financial News for the Week of March 18th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The U.S. Federal Reserve raised interest rates for the first time since 2018, and signaled it is prepared to raise rates substantially in order to contain inflation.
- Oil prices were down this week as renewed lockdowns in China raised worries about demand. Uncertainty on the outlook is very high given Russia’s war in Ukraine, and we have marked down our own economic forecast released this week.
- U.S. economic data continued to show resilience through February, with another jump higher in housing starts. Retail sales also showed people spending more on dining out, boding well for the expected pick up in services spending.
U.S. -The Fed Amps Up Its Fight Against Inflation
There was a lot going on for markets this week in financial news: The Fed’s first interest rate hike since 2018, a busy economic data calendar, and the ongoing war in Ukraine. The most notable financial market move was the tumble in commodity prices, which has buoyed sentiment on equity markets worried about the impact on the global economy from sky-high energy costs. However, part of the reason for lower oil prices is not so positive. China has brought in new Covid lockdowns to restrain growth in cases, which is expected to dampen demand for energy.
As was widely expected, the Fed raised its policy rate 25 basis points to a range of 0.25-0.50%. What surprised markets was the sharp move up in the number of hikes Fed members expect. The median expectation of Fed members is for the midpoint of the range of the funds rate to be 2.8% at the end of next year, up from 1.6% in December, and above its long-run expectation of 2.4%. The Fed is behind the curve on containing inflation, and it needed to demonstrate that it is prepared to act quite aggressively to contain it and preserve its credibility.
Whether we actually see that many rate hikes is another matter. The Fed’s rate hike projections are not always born out. In September 2018, when it was in the middle of raising rates, it projected the funds rate would reach 3.1% by the end of 2019, above its estimate of the long-run rate of 3%. Instead, the Fed only raised rates to 2.5% before having to cut rates back to 1.75% as inflation was weaker than expected and the yield curve inverted – a classic signal that markets were starting to price in a recession.
Our latest forecast also downgraded economic growth in financial news, upgraded inflation, and raised the number of rate hikes expected. However, we expect fewer hikes than the Fed (Chart 1). Our forecast for economic growth is a bit softer than the Fed, and is consistent with our view that fewer rate hikes are required.
Rate hikes take time to slow economic growth, but borrowing rates like mortgages, have already moved up. The average 30-year mortgage rate moved above 4% for the first time since 2019. Even so, home builders ramped up the pace of housing starts in February to 1.769 million units, coming in ahead of market expectations, and the highest monthly reading of the pandemic (see report). However, building permits were down for both single and multi-unit projects, pointing to some giveback in March. The U.S. housing market could certainly use some new supply with the existing home market drum tight, as we discussed in our recent report.
February retail sales were another sign of strength in the U.S. economy (see report). January sales were revised upwards substantially, suggesting consumer spending is looking a bit stronger in Q1. There were also signs that consumers are shaking off their caution and heading back out to restaurants and bars, as fears of the Omicron variant subsided. Sales at food services and drinking places jumped up a healthy 2.5% in February (Chart 2) after falling through December and January. Overall, between higher rates, higher energy prices and, dwindling fiscal support, we expect the pace of growth in U.S. economy to slow through 2022. However, we expect low unemployment and pent-up demand to support a solid 2.3% pace through the year.
Leslie Preston, Senior Economist | 416-983-7053
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 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.
Financial News for the Week of March 11th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- It was another volatile week across global financial markets as the recent surge in commodity prices stoked fears of an inflationary spiral. Sentiment improved through the latter half of the week, allowing global equities to pare losses.
- Oil remained a focal point, with WTI briefly touching $128 per-barrel on Tuesday following President Biden’s announcement to ban the import of Russian oil. Gains were later reversed on the hopes of increased OPEC production.
- February CPI data showed a further acceleration in consumer prices, with both headline (+7.9% y/y/) and core (+6.4% y/y) inflation rising to new 40-year highs. With price pressures likely to continue to mount over the coming months, the FOMC is certain to raise rates next week.
U.S. -Looking Through the Turmoil, Ready for Lift-off
Despite Fed officials entering a ‘quiet week’ ahead of next Thursday’s FOMC meeting, it was anything but across global financial markets in financial news. New economic sanctions and fears of a prolonged Ukraine-Russia conflict have pushed commodity prices significantly higher in recent weeks, stoking fears of an inflationary spiral that could trigger a recession across Europe. The risk-off sentiment abated through the latter half of this week, allowing global equites to pare losses. At the time of writing, the S&P 500 was still lower by about 1.5%. Yields rose through much of the week, as intensifying price pressures pushed the US 10-year higher by 25 basis points to just over 2%.
Across the commodity space, oil remained a focal point. On Tuesday, both WTI and Brent briefly touched levels not seen since 2008, hitting $128 and $133 per-barrel, respectively. The sharp gains followed President Biden’s announcement that the U.S. will immediately ban imports of Russian oil. The UK made a similar commitment, agreeing to phase-out imports of Russian oil by year-end. Gains, however, were reversed from their intraweek highs on hopes that OPEC members would boost production to help make up for some of the shortfall. At the time of writing, WTI is currently down 7% on the week, trading at $108 per-barrel (Chart 1).
Inflation also remained a key theme for the week, as Thursday’s release of February CPI data showed a further acceleration in consumer prices. Headline CPI rose 0.8% month-on-month (m/m), which drove the year-on-year measure to 7.9% (Chart 2). Core inflation was up a softer 0.5% m/m – a slight deceleration from January – though still enough to push the annual reading to a new 40-year high of 6.4%. Higher fuel prices (6.4% m/m), food (1.0% m/m) and shelter costs (0.5% m/m) were the biggest contributors to February’s price gain. Also noteworthy was the modest cooling in used vehicle prices (-0.2% m/m), which came after four consecutive months of strong gains. New vehicle prices were still higher in February, though even here we have seen a meaningful deceleration in price growth in recent months, suggesting consumer’s may be nearing a ceiling of what they’re willing to spend for a new vehicle.
Unfortunately, inflationary pressures are likely to continue to move higher over the coming months, as the recent surge in commodity prices will continue to filter through to higher prices both at the pump and grocery stores. Even if gasoline prices hung at today’s level of $4.32 per-gallon for the rest of the month, that alone would lift headline CPI for March by an additional 0.9 percentage points.
The pinch on consumer’s wallets could lead to slightly weaker discretionary spending over the near-term, but this is unlikely to dissuade Fed officials from raising rates at next week’s meeting in further financial news. Inflationary pressures are running too hot, and the labor market has become as tight as it has ever been. Failing to move on rates runs the risk of the Fed falling even further behind the curve, which would erode its credibility and jeopardize the economic recovery. Expect the FOMC to acknowledge the recent tightening in financial market conditions, but maintain its hawkish tone, setting the stage for what will be a series of rate hikes over the remainder of the year.
Thomas Feltmate, 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 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.
Financial News for the Week of March 4th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The labor market added 678k jobs in February, and the unemployment rate fell to 3.8% - the lowest reading since the pandemic began.
- Early indicators suggest that manufacturing and services sectors were out of sync in February, with the former accelerating and the latter slowing down. The difference is largely attributed to continued weakness in demand for services.
- The Russia-Ukraine War continues to reverberate through financial markets, lifting commodity prices and threatening to tighten financial conditions further. The Fed is likely to raise interest rates in March, but the speed of future rate hikes is more uncertain.
U.S. -Economy Marches On, Volatility Spikes due to the Russia-Ukraine War
It’s the first week of March, which means we get the initial glance at how the economy did in February, when the Omicron wave started to ease in financial news. This morning, the U.S. Bureau of Labor Statistics surprised the market with 678k jobs created in February, well above 400k anticipated by forecasters. This was on top of an upward revision of 92k to December and January. The unemployment rate fell to 3.8 % – the lowest reading since the pandemic, just 0.3 percentage points above the level two years ago. The labor force – a measure of people working or actively looking for work – also made progress. The labor force participation rate ticked up to 62.3% after 304k people joined labor force in February (Chart 1). All in all, labor market is getting tighter and tighter.
In the meantime, leading business indicators diverged. As measured by the ISM Index, the manufacturing sector reversed three months of decline, accelerating to 58.6. Demand was solid, with new orders moving above 60 again. Production accelerated, but it could have been even stronger without materials supply constraints. The backlog of orders index jumped by almost 9 percentage points (ppts), while supplier deliveries inched 0.5 ppts higher. Despite all these challenges, inventory rebuilding continued, albeit at a very slow pace adding only 0.4 percentage points in February.
Surprisingly, the services sector slowed in February, with the two demand indicators – business activity and new orders – declining to mid-50 levels, last seen exactly one year ago. The consensus anticipated a modest increase, expecting that the fading threat of Omicron would help the services sector bounce back. Respondents blamed the post-holiday fatigue and difficult business conditions, affected by capacity constraints, inflation, logistical challenges, and labor shortages. Indeed, supply-side indicators deteriorated as delivery times slowed again while the employment index moved back into the contractionary territory.
The price sub-indexes remained elevated, although price pressures seem to track lower in the manufacturing sector, while services continue to struggle with a reading above 83 (Chart 2). Despite these differences, there is little doubt that next week’s CPI reading will come in much higher than the 2% target. With the threat of higher prices becoming more entrenched, the Fed is unlikely to hesitate to raise the fed funds rate by 25 basis points on March 16th.
Meanwhile, Russia’s invasion of Ukraine has reverberated through financial markets, lifting a key measure of volatility to the highest level in more than a year. Although the U.S. trade dependency on Russian and Ukrainian products is limited to less than 1% (according to the World Bank), the U.S. economy may suffer through other channels. The conflict has already resulted in the biggest weekly surge in commodity prices since 1974, and threatens to exacerbate pandemic-induced logistical challenges in financial news. Both of these forces will lead to higher prices, and a drag on economic growth. Meanwhile, further deterioration in financial conditions would be equivalent to monetary tightening, which could force the Fed to slow down the speed of rate hikes in the future.
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 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.
Financial News for the Week of February 25th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The Russian invasion of Ukraine shook markets this week with the S&P 500 entering correction territory before making gains Friday. Given Russia’s role as a key global energy producer, market concerns about supplies have driven prices for oil and natural gas higher.
- For the U.S., the most immediate impact will come from higher oil prices, which will keep inflation elevated and weigh on growth. The impact will depend on how long the conflict lasts.
- Barring severe market disruption, we still expect the Fed to hike rates in March. The core PCE deflator reached 5.2% year-on-year in January, underscoring that the Fed is behind the curve on inflation and can’t wait for the perfect time to hike.
U.S. -All About Inflation and Geopolitics
Regrettably, Russia made risk reality this week, launching an all-out invasion of Ukraine in geopolitical and financial news. The threat of Russian military aggression had been souring market sentiment for several weeks now, and the invasion worsened declines in equity markets and sent energy prices higher (Chart 1). The S&P 500 entered correction territory this week, relative to its early January highs, and was down 0.2% at time of writing versus a week ago. With Russia’s role as a key global energy supplier, worries about energy supply have driven prices for oil and natural gas higher. The Brent crude benchmark crossed the $100 per barrel threshold for the first time since 2014.
Market selloffs at the outset of wars have historically been short and reversed quickly. That said, there is still likely to be an economic toll on global growth from the conflict, with Europe likely to take the biggest hit. The outcome depends on how long the conflict goes on, and market reaction. We outlined some potential scenarios in our recent report Questions? We’ve Got Answers.
For the U.S., the most immediate impact will come from higher oil prices. These will keep inflation elevated and weigh on purchasing power longer than previously expected. We expect prices to ease as the conflict does, but how long it lasts is highly uncertain. The West Texas Intermediate oil price is around $92 per barrel at time of writing, up over 20% from the start of the year. If it were to remain above $90 per barrel for the remained of the year, it would shave a few tenths off of real GDP growth in 2022. We are currently tracking real GDP to grow of 2.8% in 2022 (Q4/Q4), so a slightly softer pace would still be a solid pace for growth.
The conflict in Europe comes just three weeks ahead of what is widely expected to be the Federal Reserve’s first interest rate hike. The war is unlikely to prevent the Fed from taking its policy rate off the floor. At 0.5%, the federal funds rate will remain highly stimulative. The Fed is behind the curve on inflation and can no longer wait for the perfect moment to begin normalizing policy.
On that front, the core personal consumption expenditure (PCE) deflator – the Fed’s preferred indicator – was up 5.2% in January, the fastest rate in nearly 40 years. While a bit lower than the 6% increase in the core CPI, it is still a lot higher than the Fed would like. Monetary policy works with a lag and rate hikes this year will not do much to reduce inflation until next year. In the meantime, a lot has to go right to slow inflation’s roll. This increases the urgency to raise rates now or risk unmooring expectations and having to hurt the economy more later in order to rein them back in.
One piece of good financial news this week was a solid rebound in consumer spending in January (Chart 2). The rebound was driven by durable goods, led by spending on vehicles. Spending on close contact services weakened, showing the impact of consumer caution as Covid cases rose. We expect these categories to rebound in February and March, with the high-frequency data already showing that consumers are returning to restaurants and air travel.
Leslie Preston, Director | 416-983-7053
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 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.
Financial News for the Week of February 18th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Inflation concerns and rising geopolitical tensions took a toll on equity markets this week. Regarding inflation and monetary policy, minutes from the January FOMC meeting indicate that most participants believe that the Fed should hike rates at a faster clip than it did during the post-2015 period.
- Retail sales beat market expectations in January, rising 3.8%. Driving the gain were strong receipts at auto & parts dealers and non-store retailers.
- Housing starts fell 4.1% in January, but on a trend basis remain at the highest level since 2006. Existing home sales were upbeat, rising 6.7% last month. The strong showing likely reflects some pull-forward in activity.
U.S. -All About Inflation and Geopolitics
The week started off on a ‘lovely’ note in financial news, but the high cost of roses – a fairly inelastic good on Valentine’s Day – is likely to have reminded the average consumer once again of the strong inflationary pressures the country is facing. Concerns regarding high inflation, together with rising geopolitical (Ukraine-Russia) tensions added to equity market volatility.
On inflation, minutes from the January 25-26 Federal Open Market Committee (FOMC) meeting showed growing concern over elevated inflation. From our lens, there is no longer a question of whether the Fed will hike rates soon, but by how much. On this front, most participants believed a faster pace of hikes than that of the post-2015 period would likely be warranted this time around. In this vein, St. Louis Fed President Bullard, reiterated this week that without swift Fed action, inflation may become an even more serious problem. Bullard has advocated for the front-loading of rate hikes, calling for a cumulative full percentage point hike over the next three meetings. Market odds were in tune with some front-loading last week, briefly tilting towards a 50-basis point hike in March, but have since cooled.
The Fed’s hiking pace will ultimately be heavily dependent on how the economy and especially interest rate sensitive sectors, such as housing, respond to higher rates. A series of data reports this week drove in the point that the economy started 2022 on decent footing. Retail sales surged 3.8% month-to-month in January, well above the market consensus forecast for a 2.0% print. Driving the gains were higher receipts at auto & parts dealers (5.7%) and non-store retailers (+14.5%). The latter, a proxy for online sales, is likely to have benefitted from a surge in infections last month.
Homebuilding activity, meanwhile, had a soft start to the year, with housing starts falling 4.1% (m/m) in January. Judging by the many obstacles that builders face, such as material and labor shortages, this result isn’t entirely unwarranted. Rising absenteeism among infected workers during January’s Omicron wave is also likely to have weighed on the pace of new construction. Yet, it’s important to not lose the forest for the trees. On a trend basis, homebuilding activity remains near the highest level since 2006, while homebuilder confidence remains near its highest level on record (Chart 1).
The severe housing supply shortage is supporting builder optimism and new residential construction activity in financial news. Existing home sales surged 6.7% (m/m) in January, defying market expectations for a decline. This strong sales pace bit into inventories, sinking them to the lowest level on record (Chart 2). The imbalance is likely to keep builders busy for quite some time. January’s strong showing also likely represents some pull-forward in activity with homebuyers trying to get ahead of higher mortgage rates. This may come at the expense of a slower sales pace later in the year. The intuition of higher rates, however, has proven correct, with average 30-year mortgage rates surging to around 4% in recent weeks. As the Fed pulls away from ultra-loose monetary policy, higher rates will weigh on affordability, which will take some additional steam out of demand. This is but one reason as to why the Fed’s hiking pace will bear careful watching.
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 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.