Financial News for the Week of March 8th, 2024
Financial News Highlights
- The U.S. economy added 275k jobs in February, but job gains in the prior two months were revised down significantly and the unemployment rate ticked up to 3.9% in financial news.
- In his testimony before Congress this week, Federal Reserve Chair Powell noted that economic resilience gave the FOMC time to assess the sustainability of current disinflation trends.
- Congress is set to pass half of the federal spending bills for the 2024 fiscal year this week, five months and four continuing resolutions after the fiscal year began in October.
A Busy Week in Washington
With the first quarter entering its final weeks, we received a host of important economic data this week that will help form expectations for the year ahead in financial news. This included a labor market pulse check in addition to Federal Reserve Chair Powell’s semi-annual testimony before Congress. Equity markets continued to notch record highs, with the S&P 500 rising 0.8% on the week, while Treasury yields fell by roughly 10 basis-points as of the time of writing.
The headline release for this week was Friday’s employment report, which showed that 275k jobs had been added in February. While job gains in the prior two months were revised down by a considerable 167k jobs, the economy still saw solid and accelerating job growth moving into 2024 (Chart 1). However, the unemployment rate ticked up by 0.2 percentage-points to 3.9%, in part due to a return of positive labor force growth. On aggregate, the labor market remains healthy but is continuing to moderate towards a more balanced state. This will be welcome news for the Federal Reserve as they target their dual mandate of maximum sustainable employment and price stability.
The shift towards a more balanced risk outlook was also noted in Chair Powell’s testimony to Congressional committees this week. In his remarks he stated that the resilience of the economy and the labor market gave the FOMC time to assess the sustainability of current disinflation trends. While Powell did note that it would likely be necessary to implement less restrictive policy this year, he cautioned against the risk of easing pre-maturely. Solid job growth and an economy that continues to exhibit above-trend growth support Chair Powell’s assessment and our expectation that the FOMC will hold off until July to begin lowering interest rates.
Also on Capitol Hill this week, Congress passed half of the federal spending bills for fiscal year 2024. With funding for six federal departments set to expire on Friday – legislated by the fourth continuing resolution of this cycle passed last week – the House passed a package of appropriation bills on Wednesday for the departments subject to the deadline. Senate approval and the President’s signature is expected ahead of the midnight deadline on Friday. The other six appropriations bills will need to be passed ahead of their March 22nd deadline, but aggregate spending levels are expected to be consistent with the limits previously agreed to by Congress (Chart 2). Removing the near-term risk of a government shutdown is undoubtedly positive, but ongoing structural deficits leave the sustainability of the national debt a long-term risk, which was also noted by Chair Powell in Congress this week.
In the near-term, markets will be closely watching the February CPI inflation data release next week, which is expected to show a deceleration from January’s unexpected uptick. Further progress on disinflation will be required before the Federal Reserve considers shifting its current policy stance.
Andrew Foran, Economist | 416-350-8927
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of March 1st, 2024
Financial News Highlights
- January’s personal and income spending report landed just where it was expected to, with the only surprise coming from a bigger than expected lift from nominal personal income growth in financial news.
- The Fed’s preferred measure of inflation, core personal consumption expenditure prices, cooled to 2.8% year-on-year, with near-term trends suggesting it has room to fall.
- A weaker-than-expected ISM manufacturing report helped support the notion that demand is cooling.
Coming Off the Boil?
January’s personal and income spending report landed just where it was expected to, with the only surprise coming from a bigger lift from nominal personal income growth in financial news. The as-expected print comes on the heels of updated GDP data that showed consumer spending closed out last year at an even better pace than originally thought. Most importantly, an upside inflation surprise was averted in January, allowing markets to let out a sigh of relief. After the data release Treasury yields tumbled and equities rallied. The data showed that price pressures continue to cool off. However, for a cautious Fed more progress will have to be made, leaving the first policy rate cuts a ways away.
First and foremost, this week’s personal income and spending report showed real personal consumption expenditures (PCE) pulled back 0.1% in January after healthy gains in November and December. Not a big surprise after January’s retail sales report showed a significant pullback. With some weather related factors weighing on demand it’s likely that this was more of a one-off than a new trend and February will likely show some bounce back.
Stronger-than- expected growth in personal income was largely a result of a larger cost of living adjustment in social security payments (and other government transfers), and the inflation adjusted real personal disposable income (PDI) measure showed no growth. Looking forward, this is what we’re interested in, as the downbeat month shaved two percentage points off of annual real PDI growth, bringing it down to 2.1% year-on-year. A deceleration in total real income growth is going to be part of the formula that cools the relentless consumer demand we’ve seen from the U.S. since the pandemic.
Of course, the Fed isn’t after just slowing the economy, but bringing demand and supply into better balance to tame inflation. On this front, yesterday’s report brought welcome news. The Fed’s preferred measure of inflation (core PCE) cooled to 2.8% year-on-year. Yes, still above the Fed’s target, but this is owing to base-effects from last year. Take a closer look at any near-term metrics and inflation is looking a lot closer to target. The three-month and six-month rates are at 2.6% and 2.5% (annualized), respectively. Smooth out some of the month-to-month noise in the series by taking a rolling quarterly rate of change, and core PCE prices have been advancing between 2% and 2.3% (annualized) since last September (Chart 1).
February’s ISM manufacturing report closed out the week, and supported the notion that demand is coming off a boil. With a 47.8 print for the month, the reading fell well short of market expectations and signaled that the recovery in the manufacturing sector is progressing rather slowly (Chart 2). Moreover, new manufacturing orders show that demand remains tepid.
For the Fed, these indicators come as signs that the relentless demand that powered the U.S. economy in late-2023 might be cooling off. Next Tuesday’s February ISM services report should shed light on the much larger services sector, while Fed Chair Jerome Powell’s testimony on Wednesday will hopefully give us a better sense of how the Fed is viewing these latest numbers.
Andrew Hencic, Senior Economist | 416-944-5307
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of February 23rd, 2024
Financial News Highlights
- U.S. inflation rose more than anticipated to start the year, on a Consumer Price Index basis, largely due to greater price pressures within the services sector in financial news.
- However, retail spending surprised to the downside in January, suggesting that consumer spending may be less vigorous than the stunning pace of last year.
- A slowdown in housing starts and less optimistic small businesses also suggest that economic momentum may be cooling.
Slow Your Roll
Slow your roll. That was the messaging communicated in the Federal Reserve’s meeting minutes released earlier this week. In hindsight, Fed officials had every reason to remain cautious in timing the pivot to policy easing. Since the January 30th-31st FOMC meeting, the economic data has done little to instill further confidence that inflationary pressures will continue to recede over the coming months. Not only did the January employment report come in more than double expectations, but a few inflation indicators (including CPI, PPI, and ISM price sub-indices) all came in much hotter-than-expected in January (Chart 1).
Market pricing has adjusted accordingly in recent weeks, with investors now positioned for a June rate cut and 100 basis points (bps) of policy easing by year-end – a trajectory that more closely aligns to both the FOMC’s and our own forecast (Chart 2).
While Fed officials acknowledged that inflation and employment risks are coming back into better balance, the minutes revealed that most participants remain concerned about the risk of “moving too quickly to ease the stance of policy”. Moreover, some officials cited the risk that stronger aggregate demand or a slow-down in the supply-side recovery could impede further progress on the inflation front. All of this argues for a more agile, data dependent approach to reducing the policy rate.
This is especially true given the recent growth dynamics. Economic growth remained incredibly resilient through the second half of last year – averaging an impressive 4% (annualized) or more than double its long-run potential. While first-quarter momentum looks to have lost a step, it’s still tracking a relatively robust 2-2.5%. As highlighted in our Quarterly Q&A publication released earlier this week, our current forecast assumes economic momentum will continue to soften as the year progresses. However, this is largely predicated on a further cooling in the labor market, resulting in slower income growth and weaker consumer spending. Should the labor market prove more resilient, then there’s an obvious upside risk to both spending and near-term inflation dynamics.
Next week we’ll get a pulse check on consumer spending and income trends for January. Accompanying the release will be the core PCE inflation data, which is likely to show an increase of 0.4% month-on-month – the strongest monthly gain in a year. It remains to be seen if January’s acceleration is a one-off, perhaps influenced by businesses increasing prices at the start of the year in a way that may not be fully captured by seasonal adjustment factors, or whether it’s the beginning of something more insidious. Either way, the recent uptick in inflationary pressures serves as a reminder that the descent back to 2% will likely come with some turbulence.
This is exactly why Fed Governors have been preaching patience over the past few weeks. Perhaps no one said it better than Christopher Waller, who noted “the strength of economy and the recent data on inflation mean it is appropriate to be patient, careful, methodical, deliberate – pick your favorite synonym”. “Whatever word you pick, they all translate to one idea: What’s the rush?”.
Thomas Feltmate, Director & Senior Economist | 416- 944-5730
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of February 16th, 2024
Financial News Highlights
- U.S. inflation rose more than anticipated to start the year, on a Consumer Price Index basis, largely due to greater price pressures within the services sector in financial news.
- However, retail spending surprised to the downside in January, suggesting that consumer spending may be less vigorous than the stunning pace of last year.
- A slowdown in housing starts and less optimistic small businesses also suggest that economic momentum may be cooling.
Inflation Progress Stalls and Spending Falls in January
This week saw some key data releases to help gauge the state of the U.S. economy at the start of 2024, and the likely timing of a Fed rate cut. Among them were the CPI inflation and retail sales reports for January. While inflation was higher than expected, retail spending came in notably lower. Markets reacted strongly to the inflation data with stocks falling sharply and treasury yields rising.
Taking a closer looker at CPI, the headline figure came in at 3.1% year-on-year (Chart 1). While this was lower than December’s 3.4%, it was higher than market expectations for 2.9%. The core measure matched December’s pace at 3.9%, but again was higher than expectations (3.7%) in financial news. The near-term movements showed that progress on the disinflation front stalled a bit, largely due to services. Both monthly headline and core inflation accelerated relative to December. Also, both the 3-month and 6-month annualized growth for core CPI accelerated, suggesting that the process to tame inflation is likely to progress in uneven spurts. The producer price index corroborated the stalled CPI signal, with the PPI rising by 0.3% m/m in January (markets expected 0.1%) relative to -0.1% in December.
Turning to retail spending, consumers were a lot less jolly coming off the holiday season. Retail sales declined by 0.8% m/m in January (Chart 2). The sizeable decline was much larger than market expectations, however severe winter weather during January likely played a part in keeping consumers on the sidelines. Technical aspects of how the seasonally adjusted data is calculated may also have contributed to the relatively large decline. Nonetheless, the pullback suggests that consumer spending may be less of tailwind to U.S. economic resilience than it was last year.
Signals from the small business sector also suggest that economic activity might be slower in 2024. The NFIB’s small business optimism index declined to 89.9 from 91.1 in December, marking the biggest monthly decline since late-2022. On balance, small firms were generally less upbeat about their economic prospects, with the net percent of firms anticipating a better economy falling by 2 points. Given the higher exposure of small businesses to domestic economic conditions compared to larger firms, their downbeat mood points to headwinds ahead for the economy.
On the housing front, starts also disappointed expectations falling 14.8% to a five-month low (1.33 million) in January. The decline was in both the single and multi-family segments. Permits for future construction also fell on the month, implying that recovery in the housing market will be slow as buyers await lower mortgage rates.
Overall, data for January largely came in below expectations. This has left many market participants wondering what it all means for the timing of rate cuts. FOMC members have repeatedly stated that they need to see steady evidence that inflation is on a consistent path back to 2%. While the CPI and PPI data suggest that progress may be slow going for a bit, the pullback in other indicators point to an economy that is cooling. As such, Fed members may soon have the evidence that they need to begin the cutting cycle – it may just be later than markets desire.
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 financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of February 9th, 2024
Financial News Highlights
- The ISM Services index, which was on the cusp of falling into contractionary territory in December, improved notably in January, rising 2.9 points to 53.4 in financial news. The one blemish to the report was a sharp move up in the prices index.
- With little on the data front, a series of Fed speeches took center stage this week. The key message was that with the economy remaining on decent footing, the Fed could afford to show patience on rate cuts. This didn’t interrupt the uptrend in equity markets, with the S&P 500 reaching a new milestone – the 500 mark.
Fed Officials Continue to Signal Patience on Rate Cuts
Recent economic reports focusing on GDP and employment growth have driven home the point that the U.S. economy remains on solid footing. This week’s limited data provided further support to this view. In this vein, several Fed officials this week reiterated their message that there’s no rush to cut interest rates, with bond yields trending moderately higher as a result. In what appeared to be a return of ‘good news being good news again’, stock markets shrugged off the prospect of interest rates remaining higher for longer and continued to trek higher, with the S&P 500 reaching another milestone by hitting the 5000 mark.
The ISM Services index, which was on the cusp of falling into contractionary territory in December, moved up notably in January, rising close to three points to 53.4. Looking under the hood, gains in three of the four main subcomponents helped lift the index higher. Of note, the employment sub-component flipped to signaling growth, as it jumped 6.7 points to 50.5. The one blemish to the report, was the fact that the prices index shot higher in January (Chart 1). A month of data does not make a trend, but the increase could signal additional inflationary pressure ahead.
Weekly jobless claims data were consistent with a healthy labor market. Initial and continuing jobless claims continued to head lower (Chart 2). While several companies have announced plans to trim headcount this year, this is not yet being reflected in labor market data, suggesting that other businesses are growing.
With very little in the way of primary data releases, speeches from several Fed presidents and other Fed officials took center stage this week. Overall, the messaging was similar: the Fed needs to see further improvement on inflation, and with the economy on solid footing it can afford to be patient about the timing of rate cuts in financial news. Their remarks largely echoed those made by Fed Chair Powell on Sunday. Besides reiterating his message that the Fed is wary of cutting rates too soon, Powell covered a lot of ground in the ‘60 Minutes’ interview. Two comments a bit peripheral to monetary policy stood out. The first was on commercial real estate (CRE), where Powell characterized the risks as a ‘manageable’ problem for larger banks and alluded to the low probability of a repeat of the events that unfolded during the Global Financial Crisis. However, he did note that some smaller banks that have large exposures to CRE may ‘close or be merged out’.
The other comment from Powell that stood out was his assertion that the U.S. is on an “unsustainable” fiscal path, with debt growing faster than the economy in the long run. To this end, the Congressional Budget Office (CBO) released new 10-year projections this week, which showed that the ratio of federal publicly held debt to GDP will rise from 97.3% last year to record high of 116% by 2034.
Looking ahead to next week, January’s inflation report will take center stage. The BLS released revisions to CPI data this morning, which were relatively minor and left the year-on-year path for inflation broadly unchanged. As for January, the market consensus expects a further moderation in the core measure.
Admir Kolaj, Economist | 416-944-6318
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of February 2nd, 2024
Financial News Highlights
- The Federal Reserve opted to hold rates steady in their first decision of the year in order to give themselves more time to assess the sustainability of current disinflation trends in financial news.
- Employment gains in January nearly doubled expectations as strong upward revisions to December carried forward into 2024.
- U.S. Treasury markets experienced volatility this week as a decline in yields prompted by a dovish interpretation of Wednesday’s Federal Reserve decision was reversed by stronger than expected employment data on Friday.
Resilient Labor Demand and A Patient Fed
January ended with a big week for economic data, including the first Federal Reserve decision of the year and the first employment data reading in financial news. While the Fed’s statement dropped any tightening bias, Chair Powell’s press conference curtailed market hopes for a near-term pivot to less restrictive monetary policy. This saw Treasury yields fall steeply after the meeting. However, this descent was ultimately short-lived, as much stronger than expected employment data on Friday sent yields higher. At time of writing, the ten-year Treasury yield was 12 basis-points lower on the week.
Overall, the messaging from the Federal Reserve on Wednesday was positive. Chair Powell stated that the committee was pleased by the progress made thus far on returning inflation to their 2% target, but noted that they would require more time to assess the sustainability of current disinflation trends (Chart 1). With economic growth accelerating last year on the back of strong consumption growth, the labor market remaining solid, and geopolitical tensions posing challenges to supply chains (and hence inflation), caution is likely wise. Chair Powell also stated that he viewed it as unlikely that the FOMC would possess the confidence to reduce interest rates by the March meeting in six week’s time.
Powell’s caution was further validated when we received the January employment data on Friday. Not only did we see a very strong 353k jobs added in the first month of the year, but last year’s total job gains were also revised up to 3.1 million, well above the prior reading for 2.7 million, with much of the revised strength coming through the second half of the year (Chart 2). Furthermore, wage growth appears to be accelerating, with the three-month annualized change in average hourly wages rising to a twenty-month high in January. Although near-term strength in the labor market is expected to recede over the coming months, sustained imbalances in the labor market is a risk that the Fed is acutely aware of.
Elsewhere this week, the ISM Manufacturing Purchasing Managers’ Index (PMI) showed that industrial activity continued to contract in January, but by less than expected. Elevated interest rates continue to weigh on the sector, but demand has begun to show signs of improvement, which has stabilized aggregate production output. Forward pricing in financial markets for the eventual decline in interest rates expected this year will likely provide relief to the manufacturing sector moving forward as the demand for goods improves.
The lingering question, however, is when will the Federal Reserve begin to drawdown interest rates? Markets have broadly abandoned their hopes for a March cut after this week, with May now being the expected timeline with about 80% probability as of the time of writing. Upcoming data will likely provide greater clarity on the timing of the introduction of less restrictive monetary policy, including a 60 Minutes interview with Chair Powell on Sunday and the Federal Reserve Senior Loan Officer Opinion Survey on Monday.
Andrew Foran, Economist | 416-350-8927
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of January 26th, 2024
Financial News Highlights
- The U.S. economy ended 2023 on a solid note, with GDP rising 3.3% quarter-over-quarter (annualized) – smashing expectations for a more moderate gain of 2% in financial news.
- The consumer remained a key factor underpinning last quarter’s strength, with spending accelerating sharply through the holiday shopping season.
- Inflation continued to drift lower in December, with the 12-month change on core PCE – the Fed’s preferred inflation measure – slipping below 3%.
The Final Approach
The latest data has shown the U.S. economy had all the markings of a soft landing as 2023 drew to a close in financial news. Economic growth held up better than expected, the labor market is coming back into better balance, and price pressures are quickly abating. Market pricing on the timing of the first Fed rate cut has seesawed between March and May in recent months, with March currently priced as a coin-toss. But with progress on the inflation front showing no signs of stalling, market sentiment remained in risk-on mode this week, with the S&P 500 edging up 1% for the week, reaching yet another all-time high. Shorter-term yields drifted a bit lower, leading to a further flattening in the yield curve. At the time of writing, the inversion of the 10Y-2Y spread had narrowed to just -20bps – well off the peak inversion of -110bps seen back in July.
The Bureau of Economic Analysis’ advance estimate of fourth quarter real GDP came in at 3.3%, a downshift from Q3’s blistering 4.9%, but well above the consensus forecast calling for a more moderate gain of 2% (see commentary). Economic resilience remained on full display, with the consumer, private investment, and government spending accounting for the lion’s share of last quarter’s gain (Chart 1). While the rearview mirror isn’t always the best guide to the road ahead, the solid end to last year provides a more favorable starting point heading into 2024.
This is especially true for the consumer. The monthly income and spend figures for December – released a day after the GDP report – showed consumer spending accelerated sharply through the holiday shopping season. This was happening even though the tailwinds from excess savings had slowed from the gale force gust felt at the beginning of the tightening cycle to just a gentle breeze by the end of last year. At the same time, 27 million student loan borrowers were faced with the harsh reality of having to restart regular loan repayments in October following the expiration of the three-year student loan moratorium. But neither of these factors appear to have phased the consumer, as a still sturdy labor market has continued to support meaningful gains in real income and help to sustain a healthy pace of consumer spending.
The puzzle has been on the inflation front. Despite the economy continuing to run well above its long-run potential through H2’2023, inflation has still made incredible progress. As of December, the 12-month rate of change on core PCE fell to 2.9%, while the annualized 3-and-6-month rates slipped to 1.5% and 1.9%, respectively (Chart 2). Falling goods prices and some cooling in non-housing services have both been the key contributors to the recent downward pressure on inflation.
From the Fed’s perspective, time (and the economic data) remain on their side. With the economy showing no signs of keeling over, and the labor market still relatively tight, policymakers can afford to be patient. Fed officials will want to see at least a few more ‘soft’ readings on inflation and a bit more easing in the labor market before pulling the trigger on rate cuts.
Thomas Feltmate, Director & Senior Economist | 416- 944-5730
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of January 19th, 2024
Financial News Highlights
- Higher than expected retail sales in December suggests that consumer spending remained resilient to end the year in financial news.
- Several Fed governors sought to push back against market expectations for swift and significant rate cuts.
- The housing market ended 2023 on a sour note, with both new home construction and existing home sales falling in December.
A Resilient Consumer Dims Hopes for an Early Rate Cut
Just when you think the U.S. consumer might yield to mounting pressures currently buffeting their balance sheets, they surprise by closing out 2023 on a retail spending binge. The increased spending kept the economy on firm ground and suggests a solid hand off heading into the new year. It also caused investors to pare back expectations for a March rate cut and pushed U.S. Treasury yields higher.
Retail sales rose 0.6% month-on-month in December, following a 0.3% gain in November (Chart 1). The breadth of the increase was also noteworthy with 9 out of the 13 categories recording gains. The “control group” which factors into the calculation of personal consumption expenditure rose an even more impressive 0.8% on the month in financial news. The stellar number suggests that consumer spending grew at a healthy clip of around 2.5% (annualized) in Q4.
The stronger than expected retail sales report has resulted in upward revisions to expectations of Q4 GDP growth. After the report, the Atlanta Fed’s GDPNow growth estimate rose to 2.4% (from 2.2%), while our own estimate currently sits at 1.9%. (Chart 2). We won’t have to wait long to know for sure though, as the BEA is set to release the advance estimate of Q4 GDP next Thursday. Given expectations for the print to be relatively strong, there is even less pressure on the Fed to entertain rate cuts over the coming months.
The slew of Fed speakers making the rounds this week were quick to reinforce that point. “With economic activity and labor markets in good shape and inflation coming down gradually” Governor Waller sees “no reason to move as quickly or cut as rapidly as in the past.” He used terms such as “carefully calibrated and not rushed” and “lowered methodically and carefully” to push back against market expectations of sizeable cuts this year. Atlanta Fed President Bostic was on a similar page. He noted that rates could be cut earlier than Q3, “but the evidence would need to be convincing.” What’s more, he urged caution given the current uncertain environment (domestic budget battles, global conflict, elections etc.), which could have unpredictable economic impacts and re-ignite inflation pressures.
Turning to the housing sector, reports out this week showed housing activity ended a tumultuous year on a sour note. Housing starts fell in December reversing a portion of November’s gain, while existing home sales declined to a 14-year low. A dearth of available inventory and historically poor affordability are to blame for last year’s weak showing. However, with mortgage rates having come down by over 100 basis points from its mid-October peak, we’ve likely reached the bottom and should see some uptick in sales activity through 2024.
Ultimately, the timing and pace of rate cuts will depend on the strength of economic growth and inflationary pressures. This week’s data indicate that economic conditions are currently resilient. Last week’s CPI print shows there is still work to be done on the inflation front. The combination means that a policy pivot to rate cuts is unlikely to be top of mind for Fed officials just yet.
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 financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of January 12th, 2024
Financial News Highlights
- An upside inflation surprise didn’t do much to move markets, as the details of the report fell in line with expectations in financial news.
- The focus remains firmly on the services sector, where housing costs continue to prop up price growth.
- Looking forward, the Fed will need to see more consistent evidence of disinflation – likely delaying any policy changes to mid-year.
The Long and Bumpy Road
Taming inflation is never easy, and usually proceeds in fits and starts in financial news. So, given the experience of the past year, this week’s hotter-than-expected print to consumer price index (CPI) inflation doesn’t come as all that much of a surprise. Indeed, the details of the report left room for optimism and meant that markets brushed off the surprise – leaving ten-year U.S. treasury yields virtually unchanged on the news. The positive developments under the hood (so to speak) fell in line with consensus expectations and meant that the focus could be kept firmly on the timing of possible Fed cuts.
Headline CPI inflation rose 0.3% month-on-month (m/m), taking the annual reading for December to 3.4%. While the print did exceed market expectations, it was the more closely watched core measure that drove the muted market response. The price index excluding food and energy matched the headline gain at +0.3% m/m – a pace it has logged in four of the past five months. This is the interesting bit, on a three-month annualized basis core CPI inflation is running at 3.3%, roughly unchanged since October and still clear of the Fed’s target.
The stickiness in the core measure is slightly concerning, particularly as core goods prices remained flat, snapping a six-month run of price declines. Moreover, there is some near-term upside risk to goods prices as attacks on ships in the Red Sea affecting access to the Suez Canal have lead to a jump in freight costs (Chart 1). Despite this, what the pause in goods price deflation laid bare was the ongoing strength in services price gains.
Core services prices were up 0.4% m/m in December. Moreover, the strong price gains have been persistent, with the three-month and six-month (annualized) rates of core services inflation at 5.1% and 5.2%, respectively. Yet, while these figures are significantly higher than the Fed would feel comfortable with, there are reasons to believe conditions are improving. Currently, the largest contributing factor to services inflation is the shelter component (Chart 2). On this front relief is expected as increases in observed rents (which tend to lead the measure in the CPI report) 
have moderated sharply in recent months – a dynamic that is still gradually working through to the shelter component of CPI. Moreover, the slowdown in home price appreciation through early-2023 also continues to gradually work its way into the CPI.
The return to two percent inflation continues to be bumpy, but progress has been tangible and signs suggest that the Fed continues to be on course. After a few months of solid progress, optimism had begun to emerge that cuts might come sooner rather than later. However, price pressures remain sticky, and the economy continues to outperform. December job growth was above trend, and the Atlanta Fed Nowcast is expecting GDP growth of over 2% (annualized) in the fourth quarter or 2023.
A packed slate of Fed speakers is on tap for next week, and should hopefully give some additional insight into how they view the recent data. However, given this week’s developments, it will likely be mid-year before officials have sufficient evidence signs that they can begin loosening their policy stance.
Andrew Hencic, Senior Economist | 416-944-530
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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Financial News for the Week of January 5th, 2024
Financial News Highlights
- Minutes from the December FOMC meeting confirmed that monetary policy was “likely at or near its peak” for this tightening cycle, but showed no meaningful discussion on rate cuts in financial news.
- The U.S. economy added a better-than-expected 216k jobs in December, but downward revisions to the prior two months kept a cooling trend intact. The unemployment rate held steady at 3.7%, while wage growth accelerated slightly.
- The ISM surveys overall signaled softness. Manufacturing remained in contractionary territory in December, albeit slightly less negative, while activity in the services sector slowed but remained in expansionary territory.
Rate Cut Expectations Ease Slightly at the Start of 2024
After a festive December where a sharp pullback in long-term yields sent risk assets higher, markets have gotten off to a much more sober start in 2024. Investors have seemingly adjusted their New Year’s resolutions, resulting in more moderate expectations for interest rate cuts this year. Cuts totaling 150 basis points by the end of 2024 remains the dominant scenario. The probability for more aggressive policy loosening (i.e., 7 cuts) has fallen sharply, while the probability of slightly less aggressive loosening (i.e., 5 cuts) has increased (Chart 1). In line with these developments, the 10-year Treasury yield has recouped some of the lost ground, rising from 3.8% at the end of December to near 4% recently, and equity markets have pared back year-end gains, with the S&P 500 down 1.6% from its recent peak.
The minutes from the December FOMC meeting contributed to the softening in expectations for interest rate cuts this week. After the Fed signaled that the policy rate would head lower in 2024, there was an anticipation that rate cut talk may have featured heavily at the last meeting. Committee participants confirmed that the policy rate was “likely at or near its peak for this tightening cycle”, given the reduction in inflation in 2023 and “growing signs of demand and supply coming into better balance in product and labor markets”. But, meaningful debate on rate cuts was missing. Instead, the discussion was somewhat more balanced, touching on both the risks of maintaining rates in a restrictive position for too long and the risks of prematurely easing policy. Participants noted that their outlooks were associated with an “unusually elevated” degree of uncertainty and stressed the importance of maintaining a data-dependent approach to setting monetary policy.
Speaking of data, this morning’s payrolls report showed that hiring unexpectedly accelerated in December, with the U.S. economy adding 216 thousand jobs (see commentary) in financial news. However, a downward revision of 71 thousand jobs to the prior two months limits some of the enthusiasm of this upward surprise. On a three-month moving average basis, hiring is still trending lower, which suggests that restrictive monetary policy continues to work as intended, cooling labor demand. Nonetheless, other aspects of the report still play in favor of showing some caution on easing monetary policy. The unemployment rate held steady at 3.7%. With the labor market still tight, wage growth gained some ground in December (Chart 2). A recent pullback in the job ‘quits’ rate – a leading indicator of labor costs – suggests that wage growth is nonetheless poised to cool ahead.
Other data reports were a mixed bag. Consumers increased vehicle purchases in December (up 3.2% to 15.8 million annualized), although this appears to be partially related to the return of year-end discounts (see here). Meanwhile, the ISM indexes signaled softness. There was a slowdown in the expansion of the services side of the economy, and the manufacturing sector remained in contraction for the 14th month in row in December, albeit slightly less so on the month.
All factors considered, a loosening in monetary policy is coming, but we anticipate the Fed will show a bit more caution, with the first rate cut not likely to come until the second half of the year.
Admir Kolaj, Economist | 416-944-6318
This Financial News report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this financial news report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. Do you have any questions about your finances? As financial advisors in Cornelius NC, Naples FL, and Moultonborough NH we are happy to help.
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