Financial News for the Week of May 13th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The consumer price index (CPI) report showed that both overall and core price pressures eased a touch in year-over-year terms in April. Overall inflation fell to 8.3% y/y from 8.5% in the month prior, while core inflation fell to 6.2% from 6.5%.
- The producer price index (PPI) report echoed a similar message, with producer prices decelerating modestly in April to 11% y/y, but remaining near March’s record high of 11.5%.
- Signs of a slight tick down in inflation will do little to dissuade the Fed from removing monetary stimulus expeditiously. Despite staging a notable recovery on Friday, the S&P 500 looks to end the week down over 2%
U.S. -Slight Pullback in Inflation Won’t Change Fed’s Mind
The second week of May carried a light economic calendar, with primary data releases continuing to center on inflation in financial news. The consumer price index (CPI) report showed that inflationary pressures eased a bit in April, falling to 8.3% year-on-year (y/y) – down from 8.5% in March (Chart 1). Base effects are likely to have played a favorable role, as price pressures stemming from supply chain disruptions began to manifest in March and April of last year.
Beneath the headline, food inflation accelerated both in yearly and monthly terms, whereas energy prices eased a touch. Both, however, remain elevated at 9.4% y/y and 30.3% y/y, respectively. Excluding these two volatile categories, core prices also decelerated modestly, falling to 6.2% y/y from 6.5% y/y in March. However, several important categories bucked the trend. On the goods side, new vehicle prices were higher, while medical care, transportation, and shelter were all meaningful contributors on the services side. The transportation category was buoyed from airfares, which continued to rise sharply (18.6% m/m). Meanwhile, market-based measures of strong home price and rent growth suggest that the weighty shelter component has more upside ahead. This, together with the fact that gas prices have resumed their upward climb this month, and that we’re likely to see further upward pressure in food prices from the war in Ukraine, muddy the CPI report’s headline message that inflation may have peaked, making it prudent to wait for further confirmation to this notion in financial news.
The producer price index (PPI) report echoed a similar message to last month’s CPI numbers. Producer prices were up 11% from a year ago in April, marking an easing from an upwardly revised 11.5% y/y in March. Core PPI also eased a touch. That being said, April’s PPI showings, which are not far off from the March record highs, indicate that inflationary pressures continue to build in the production pipeline.
The small business report from the NFIB provided more of the same. In Chart 2 we can see that while the share of businesses raising (and planning to raise) average selling prices and worker compensation have eased from recent highs, they remain well above historical norms. On the other hand, the share of businesses identifying inflation as their top business problem reached a new post-1980 high in April. Another striking feature of the report is the fact that the share of small businesses expecting an improvement in the economy in the months ahead fell to a yet new record low (-50%).
Doubtful expectations about a further improvement in the economy have some basis. Signs of a slight moderation in inflation will do little to dissuade the Fed from removing monetary stimulus expeditiously, which in turn will weigh on economic momentum. In tune with this notion, risk assets continued their downward slide this week. Despite a notable bounce back Friday, the S&P 500 is down 2.6% from last week’s close and roughly 16% from peak. Of course, as Fed Chair Powell noted this week, there’s no guarantee that the Fed will see smooth sailing in its goal to engineer a soft-landing. In a speech Thursday, Chair Powell, who was recently confirmed for a second term, noted that getting inflation back to 2% will cause “some pain”. For now, however, we’re still full ship ahead with another 50-basis point hike in June.
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 May 6th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The Fed raised the monetary policy rate by 50 basis points for the first time since 2000 and signaled more hikes of the same magnitude are in the works.
- The economy added more jobs than expected in April, but the labor market remains tight with the number of workers looking for jobs retreating.
- Supply constraints continue to create a mismatch between demand and supply. Should supply fail to improve, inflation will remain high, making the Fed’s job more difficult.
U.S. -Tight Corners of the Economy
This was a big week for the U.S. economy with a Federal Reserve interest rate decision and early macroeconomic indicators for the month of April in financial news. As widely anticipated, the Fed raised the monetary policy rate by 50 basis points for the first time since 2000. More tightening is in the works: we anticipate the central bank will hike the fed funds rate in two more 50 basis point moves at its next two meetings. A that point, we expect it to return to more gradual quarter-point adjustments (see Dollars & Sense). Chair Powell’s push back against the possibility of a larger hike was first accepted as bullish by the equity market, but the sentiment reversed quickly pushing the equity market a quarter of a percent lower and bond yields 15 bps higher for the week (at the time of writing).
This morning’s jobs report surprised with 428k jobs added in February, according to the payrolls survey, well above 380k anticipated by forecasters. The unemployment rate, which is measured by the household survey held steady 3.6%. The labor force – a measure of people working or actively looking for work – dropped unexpectedly, pushing the participation rate down to 62.2%. As a result, an already sizeable shortfall relative to the pre-pandemic trend, expanded even further (Chart 1). Without progress on this front, the labor market will remain very tight, providing little relief for businesses already struggling to attract workers.
Meanwhile, leading business indicators – the ISM purchasing managers indexes – came in weaker than expected by the consensus, while remaining in the expansionary territory. The manufacturing sector decelerated for the second month in a row. All major subcomponents but the supplier deliveries index declined, with the largest drop in the employment index. Softness in demand is consistent with our expectation that consumers start to cut back on manufactured products in favor of services. In this context, a deceleration in the services sector was somewhat disappointing. The underlying details suggest that current business activity accelerated, but new orders and new export orders slipped. Another drag was the employment sub-index, which dropped back into the contractionary territory, likely due to “hypercompetitive” demand for workers, as suggested by one of the purchasing managers.
Importantly, supply constraints and challenges in logistics continue to create a mismatch between demand and supply in both sectors of the economy. Comparing to history, the supplier delivery index has been unusually strong since March of 2021, creating a wedge between this sub-component the rest of the index’s drivers (Chart 2). Another way to think about it is that delivery times remain atypically slow relative to softer demand.
Should supply fail to improve in lock steps with demand softening, inflation is likely to remain elevated in financial news. This will make it more difficult for the Fed to soften growth without crushing the economy into a recession. The good news is that the strength of consumer finances points to a softening in spending, rather than an outright retreat (see report). This should help the Fed navigate the economy out of its tight spot.
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 29th, 2022
FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- U.S. economic growth contracted in the first three months of 2022. Real GDP fell 1.4% due largely to a sizeable increase in the trade deficit.
- The U.S. goods trade deficit widened unexpectedly by almost 18% to hit a new record in March, reflecting both higher import volumes and prices.
- Personal income and consumer spending rose on a monthly basis in March. While a key inflation measure, the core PCE deflator, eased marginally to 5.2% year/year from 5.3% in February.
U.S. -GDP Drop Obscures Strong Underlying Demand
First quarter GDP was the disappointing marquee release this week, but there were plenty of silver linings in financial news. The consensus was for weak, but still positive, growth. Instead, the U.S. economy retreated by 1.4% annualized, after booming 6.9% in the fourth quarter of 2021 (see here). The unexpected retrenchment was largely due to a widening trade deficit, with slowing inventory accumulation and fading stimulus spending chipping in (Chart 1). The headline decline masked underlying strength in consumer spending and business investment, which posted solid gains of 2.7% and 9.2% respectively in the quarter.
Business investment has good momentum heading into Q2, with durable goods orders up 0.8% month-on-month (m/m) in March, after a 1.7% decline in February. The increase was driven by autos, computers and other electronics. The measure has risen in five of the last six months. The report also showed that a closely watched proxy for business investment – new orders for nondefense capital goods excluding aircraft – rose by 1% m/m, pointing to resilience in the business sector.
On the housing front, data from the S&P CoreLogic Case-Shiller Index showed that home price growth remained robust in February. Prices posted a 19.8% y/y gain, up from 19.1% in January. This was the highest growth rate since August and reflects extremely low levels of inventory relative to demand. As mortgage rates continue to climb, however, purchasing power will dim, resulting in lowered demand which should restore greater equilibrium to the market.
There are already some indications of this as sales of newly built single-family homes fell in March for the third consecutive month. New home sales were down 8.6% m/m. There was also a decline in contracts signed to purchase homes. Pending home sales headed lower for the fifth consecutive month. The metric fell 1.2% m/m in March, pushing signed contracts to the lowest level since May 2020. As prices and interest rates head higher, and a solid supply of homes under construction are completed, the current imbalance between housing supply and demand should start to close.
There was little sign of improvement in the trade deficit through the quarter, as the monthly deficit hit a new record in March. A surge in imports dwarfed export gains (Chart 2). The goods trade gap rose by 17.8% m/m to $125.3 billion. While strong demand from businesses and consumers lead to a surge in imports, rising prices also contributed to the sizeable increase in the deficit. Front-loading of imports due to geopolitical and supply-chain uncertainty saw sizeable increases in the import of consumer goods (13.6%) and motor vehicles (12%).
Finally, both nominal personal income and spending rose in March by 0.5% and 1.1% m/m respectively (see here) in financial news. Accounting for prices, real spending rose 0.2% on the month. The Fed’s preferred inflation gauge, the core personal consumption expenditure deflator, rose 5.2% y/y, a slight deceleration from February. Add it all up, and with inflation still elevated, and strong momentum in consumer spending and business investment, the Fed is expected to look past the headline decline in GDP, and press full steam ahead with policy normalization, with a 50 basis point hike next week.
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 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.