Financial News for the Week of September 29th, 2023

The Fed has been beating the drum to the “higher for longer” interest rate tune for a while in financial news. Following last week’s FOMC projections, investors are recalibrating their expectations  more in line with this view. Long-term treasury yields pushed higher in the week, with the 10-Year yield rising temporarily to a new 15-year high on Thursday, before easing to 4.53% at time of writing – still almost 10 basis points above last week’s close. Equity markets trended lower through the week, but managed to recoup most of the lost ground after Friday’s soft inflation print.

Revisions to GDP data led to a minor growth upgrade for the first quarter, but left the second unchanged. However, the picture was more nuanced underneath. Most notably, second quarter consumer spending growth was cut in half, to only 0.8% q/q (ann.). August’s Personal Income and Spending data out Friday help fill in the picture for the third quarter. Real disposable personal income fell for the third month in a row in August, while real spending (PCE) growth eased to 0.1% month-on-month (m/m), following a strong 0.6% m/m gain in July. That strength early in the quarter will still make for a strong showing for the consumer, however many hurdles are looming for the fourth quarter (see forecast). Our view is that consumer spending and economic growth will cool along with the weather this autumn, with September’s pullback in consumer confidence reinforcing this view.

Housing, which was the first part of the economy to weaken in the face of rate hikes, continues to struggle. Pending home sales, which lead closed sales by 1-2 months, fell a very sharp 7.1% (m/m) in August (Chart 1). This suggest that existing home sales could soon test new post-2010 lows. The shortage of existing homes for sale has been an added obstacle for transactions. Until recently, homebuyers appeared to have found some solace in the new home market, aided by healthier inventories and builder incentives. But with mortgage rates creeping above 7% in August, this sector is also feeling the pinch. New home sales (an inherently volatile series) trended lower that month. Daily measures show that mortgage rates have risen even higher recently and are now hovering in the 7.4%-7.6% range, a level that will surely further limit the pool of homebuyers.

Besides the challenges faced by the consumer, the UAW’s decision Friday to expand its strike and the increasing likelihood for a government shutdown next week, mark two other major potholes for the economy heading into the fourth quarter (see report). The shutdown would not only act as a drag on growth but would also delay access to key economic data, with next week’s payrolls report and the October 12th (CPI) inflation report the next two major items on the list. Having timely access to these reports is crucial with inflation still running well above target.

Thankfully, Friday’s PCE report carried some good news on the inflation front, with the Fed’s preferred inflation gauge easing from 4.3% to 3.9% year-on-year in August(Chart 2). However, the headline measure moved in the opposite direction, given an acceleration in food and energy costs. With the price of crude oil creeping higher to $93 per barrel, energy costs are likely to continue putting upward pressure on the headline measure over the near-term. All in all, it’s still a mixed picture, one that may be further complicated by a government shutdown.

Admir Kolaj, Economist | 416-944-6318