MARKET UPDATE: HOUSING STARTS, FEDERAL RESERVE, US LEADING ECONOMIC INDICATORS

What We Are Watching This Week

• Housing Starts
• Federal Reserve Opening Market Committee Rate Announcement
• US Leading Economic Indicators

Highlights From Last Week

• Consumer Price Index
• Producer Price Index (indication of input inflation)
• Retail Sales

Except for the TSX, which rallied on the back of oil, major North American stock indices experienced a predominantly downward trend throughout the week, influenced by mixed signals from inflation data and indications of a slowdown in consumer spending. Despite reaching a record high midweek, the Dow Jones Industrial Average retreated by the week’s end. Energy stocks performed well thanks to increased oil prices, whereas the technology sector saw lagging performance, attributed to weaknesses in companies like NVIDIA and other chipmakers.

The pan-European STOXX Europe 600 Index saw a 0.31% increase in local currency, marking its eighth consecutive weekly gain. This rise was propelled by upbeat corporate earnings and increasing expectations of a borrowing cost reduction by the European Central Bank (ECB) in June. France’s CAC 40 Index surged by 1.70%, Italy’s FTSE MIB gained 1.61%, and Germany’s DAX rose by 0.69%. Additionally, the UK’s FTSE 100 Index experienced a 0.94% increase.

In February, consumer prices surged by 0.4%, matching the largest increase in five months, driven mainly by higher gas prices and housing costs. This pushed the yearly inflation rate above 3%, just ahead of the Federal Reserve’s upcoming meeting, where they will discuss potential interest rate cuts. Economists had anticipated this 0.4% rise. The core rate, excluding food and energy, also increased by 0.4%, slightly above expectations. However, the 12-month core rate dipped slightly to 3.8%. Despite concerns about inflation, the Fed is holding off on rate cuts until there is more explicit evidence that inflation is slowing toward its 2% target. This latest report may delay any decision until the summer, although Wall Street is currently eyeing June as a possible starting point for a rate-reduction cycle. The Fed had raised interest rates significantly in 2022 and 2023 to combat inflation, and while inflation has moderated since then, it remains above the Fed’s comfort level.¹

Retail sales rebounded by 0.6% month-on-month (M/M) in February, reversing most of January’s decline of -1.1%. This growth was slightly below the consensus forecast of 0.8%. Sales in the auto sector increased by 1.6% M/M, led by motor vehicle dealers, while gasoline station sales rose by 0.9%, ending four consecutive months of decline due to increased gas prices. The building materials and equipment category saw a notable rise of 2.2% M/M. However, sales in the retail sales “control group,” excluding volatile components like autos, building materials, and gas, remained flat after a decline in January. Positive contributions came from miscellaneous store retailers, department stores, and food and beverage stores, while clothing and accessory stores experienced a decrease. Food services & drinking places saw a modest increase of 0.4% M/M.

The rebound in retail spending in February reflects resilience in consumer spending despite challenges like higher borrowing costs and elevated prices. However, spending is expected to moderate as the job market cools and wage gains slow. Consumer spending for Q1 is currently tracking at 2.7% annualized quarter over quarter Q/Q. This increase in retail spending poses challenges for the Federal Reserve, particularly with the recent shift in core goods prices from deflation to price growth. The Fed may remain cautious and monitor inflation’s progress before making policy changes.²

In February, the Producer Price Index (PPI) for final demand increased by 0.6%, following a 0.3% rise in January and a slight decline of 0.1% in December 2023. Over the 12 months ending in February, the final demand index rose by 1.6%, the largest increase since September 2023. Nearly two-thirds of this rise was attributed to the final demand goods index, which surged by 1.2%, while prices for final demand services increased by 0.3%. The index for final demand, excluding foods, energy, and trade services, grew by 0.4% in February, following a 0.6% increase in January. Over the 12 months ending in February, this index rose by 2.8%. Within the final demand for goods, the increase was primarily driven by a 4.4% surge in energy prices, particularly gasoline, which rose by 6.8%. Conversely, prices for hay, hayseeds, and oilseeds decreased by 8.3%. Final demand services saw a 0.3% increase, with notable rises in traveler accommodation services, outpatient care, and airline passenger services. Margins for final demand trade services declined by 0.3%, while prices for transportation and warehousing services rose by 0.9%. However, the wholesaling of chemicals and allied products experienced a notable margin decrease. Overall, the February PPI report indicates a significant increase in final demand prices, primarily driven by rising energy costs and some service sectors, while certain goods experienced price declines.³

On Thursday the US Labor Department reported that in the week ending March 9, seasonally adjusted initial claims for unemployment benefits were 209,000, a decrease of 1,000 from the previous week’s revised level, which was revised down by 7,000 to 210,000. The 4-week moving average stood at 208,000, a decrease of 500 from last week’s revised average, which was revised down by 3,750 to 208,500. The total number of continued weeks claimed for benefits in all programs for the week ending February 24 was 2,143,864, marking an increase of 22,432 from the previous week. Comparatively, there were 2,000,248 weekly claims filed for benefits in all programs during the equivalent week in 2023.⁴

The New York Federal Reserve’s Empire State business-conditions index, reflecting manufacturing activity in the state, dropped sharply by 18.5 points in March to reach a negative 20.9, indicating a significant deterioration. This decline was much larger than anticipated, as economists had predicted a negative 6 reading. Any figure below zero signifies worsening conditions. March marks the third consecutive negative reading for the Empire State Index and the fifth in the last six months. Key indicators such as new orders and shipments experienced notable declines, suggesting softening demand. Employment metrics also worsened, with the number of employees and the length of the average workweek contracting further. While firms expect conditions to improve in the next six months, optimism remains subdued. Economists had anticipated a gradual manufacturing recovery, but recent data, including the national ISM report, have disappointed expectations. Despite optimism regarding future improvements, uncertainties persist, and the manufacturing sector’s trajectory remains uncertain.⁵

Industrial production in February increased by 0.1%, exceeding expectations of no change. However, January’s production was revised to a 0.5% decline from the prior estimate of a 0.1% decrease, while December’s output was also revised to a 0.3% fall. Capacity utilization remained steady at 78.3%, slightly below the forecasted 78.5%. Manufacturing rebounded by 0.8% after a decline in the previous month, and mining rose by 2.2% following a significant drop in January, partially due to weather-related factors. However, utility output fell by 7.5% due to warmer weather. Motor vehicles and parts output increased by 1.8%. Overall, production has remained weak for the third consecutive month, prompting hopes among economists for a Federal Reserve rate cut to stimulate business investment.⁶

In early March, the consumer sentiment survey registered a slight decline from a 32-month high, suggesting some uncertainty among Americans regarding the economy’s performance in a presidential election year. The University of Michigan reported that the initial reading for March slipped to 76.5 from 76.9 the previous month. While sentiment remains close to a two-year high, it’s still significantly below the pre-pandemic peak of 101. Key details indicate that the gauge measuring current economic conditions remained unchanged at 79.4, while expectations for the next six months dropped slightly from 75.2 to 74.6 in February. Joanne Hsu, Director of Surveys of Consumers, noted that consumer views have stabilized after solid gains in previous months, with many consumers withholding judgment on the economy’s trajectory, particularly in the long term, pending the results of the November election.⁷

1. https://www.bls.gov/news.release/pdf/cpi.pdf
2. https://www.census.gov/retail/marts/www/marts_current.pdf
3. https://www.bls.gov/news.release/ppi.nr0.htm
4. https://www.dol.gov/ui/data.pdf
5. https://www.newyorkfed.org/medialibrary/media/Survey/Empire/empire2024/ESMS_2024_03.pdf?sc_lang=en&hash=F8EA0D93B2CFE49
6. https://www.federalreserve.gov/releases/g17/current/default.htm
7. http://www.sca.isr.umich.edu/?mod=article_inline

Important Information: 

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.  

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.  

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.  

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.