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.

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.