FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Equity markets stopped hemorrhaging and partially recovered from last week’s downturn. Domestic data was predominantly underwhelming, but did little to change the status quo of a solidly-growing U.S. economy.
  • Retail sales, existing home sales and housing starts all fell in September, with figures likely swayed by Hurricane Florence. Core retail sales however, rose by 0.5%, which suggests that consumption grew at a healthy 3% (ann.) in Q3.
  • The FOMC minutes reinforced the view for continued interest rates hikes. Still, downside risks are percolating (mostly external) and the path ahead will require careful navigation.

 

 


Plenty of Potholes Will Require Careful Navigation Ahead


Financial news- rising mortgage rates weighing on existing home sales Equity markets stopped the hemorrhaging and partially recovered from last week’s downturn. A cocktail of information, which included FOMC minutes, domestic data and thorny international developments, resulted in bouts of volatility. Domestic data was predominantly underwhelming, but did little to change the status quo of a solidly-growing U.S. economy. Retail sales edged up by only 0.1% (m/m) in September – well below market expectations. While disappointing, the report did not raise any red flags. The headline print was likely swayed by Hurricane Florence, given a steep drop in spending at bars and restaurants. More importantly, core sales still rose at a healthy pace of 0.5%, pointing to continued robust momentum in consumption. With September retail sales in the bag, consumer spending in the third quarter likely rose at solid pace of around 3% annualized.

Despite a strong consumer backdrop, the housing market continues to struggle. Existing home sales fell 3.4% in September, marking the sixth straight monthly decline. Housing starts didn’t do any better, falling 5.3% to 1.20 million. Again, part of the weakness can be chalked up to weather-related disruptions, with both existing home sales and starts in the South recording the sharpest drops since late 2015. Going forward, tight inventories of homes for sale should help support moderate gains in new homebuilding. Still, limited supply will keep upward pressure on prices and weigh on demand, especially in the near-term. Rising interest rates, which appear to be behind some of the recent malaise, will be an added headwind (Chart 1).

Financial News- underlying inflation trends steady in September The FOMC minutes released this week reinforced the view of higher interest rates ahead. The key message here is that as long as the economy continues to expand at a solid pace and inflation remains close to target, the Fed will continue to hike rates, likely by 25 basis points a quarter. In addition, a number of participants believe that it will be necessary to raise rates above neutral temporarily, in order to avoid overshooting inflation or contributing to financial imbalances. For a deeper dive on how high rates can go, see here.

While the data remain supportive of ongoing rate hikes, there is no shortage of potholes in the path ahead, particularly on the international front. Across the pond,  Brexit remains a source of uncertainty, while recent developments in Italy have also become a major cause of concern. The EU Commission has determined that Italy’s draft budget is in serious breach of EU budget rules, and may reject it. The Rome-Brussels rift, which has sent Italian bond yields skyward (Chart 2), will bear close watching next week with Italy expected to reply to the commission by Monday. Chinese economic growth is slowing and policymakers there have a tough balancing act between deleveraging and maintaining adequate growth. A sour exchange between trade representatives of the EU and U.S. this week also reminds us that the Trans-Atlantic trade truce rests on feeble foundations. All told, plenty of risks remain and it won’t be an easy path to navigate.

Admir Kolaj, Economist | 416-944-6318

 


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