Financial News for the Week of November 24th, 2023

U.S. Treasury yields extended their decline this week, with the 10-year now hovering around 4.5% in financial news. As economic data have decelerated, expectations for policy easing next year have helped markets continue to rally – up about 1% this week. This week, minutes from the Federal Open Market Committee (FOMC) meeting reinforced the Fed’s messaging that patience is warranted while the disinflation process is working, while housing starts data showcased that higher interest rates are working to cool the economy. Coming off the Thanksgiving holiday, all eyes are now tuned to next week’s consumer spending report for October for signs of slowing economic momentum and cooling inflation.

The minutes from the FOMC’s last meeting essentially backed up the hawkish signals the Fed has been putting out while they hold the policy rate fixed. Committee members noted how the economy stayed unexpectedly hot through the third quarter of the year, powered by relentless consumer spending. With the supply shocks from the pandemic and the war in Ukraine still gradually resolving themselves, persistently strong aggregate demand helped keep pressure on prices through much of the year. However, committee members judged that this may be starting to shift (Chart 1). This has left the Fed squarely focused on cooling demand to tame inflation pressures. On this front, the Fed maintains that restrictive policy rates are working, and are at an appropriate level. Moreover, with members agreeing that there needs to be clear evidence that inflation is on a solid trajectory back to 2% before easing, and upside risks ever-present, officials will be keenly looking out for any signs that more needs to be done to restore the supply-demand balance.

On the demand side, the housing market is clearly responding to the surge in borrowing costs since the summer, with existing home sales in October falling to their lowest level since 2010 (Chart 2). However, conditions today are drastically different than in 2010, when the housing bubble burst leading to an abundance of supply, and a tepid recovery after the Global Financial Crisis saw a drastic improvement in affordability. Today, affordability is weighing on activity as high prices and financing costs make homes their least affordable since the mid-80s. With the Fed poised to keep rates at multi-decade highs, a quick turnaround is unlikely.

However, with healthy economic momentum through the third quarter all eyes will be on next week’s consumer income and spending report for signs of slowing demand growth. With payrolls growth slowing in October, consensus expectations are for real consumer spending growth to slow from 0.4% month-on-month (m/m) in September to 0.1% in October. The Fed’s preferred inflation measure, the core PCE deflator, is expected to follow suit, slowing to 0.2% m/m from 0.4% in September.

Of course, given the experience of the past year, the risks run to the upside, and that the American consumer will once again prove to be more resilient than expected. In that event, the Fed has told us it stands ready to tighten policy further if they assess that data show, “progress toward the Committee’s inflation objective was insufficient.”

Andrew Hencic, Senior Economist | 416-944-5307