What We Are Watching This Week
- US Consumer Price Index (CPI) and Core CPI
- US Retail Sales
- Industrial Production
- Housing Starts
- Producer Price Index (PPI) and Core PPI
Highlights From Last Week
- S&P Services PMI
- Consumer Credit
- CBO Briefing On Budget and Economic Outlook
During the week, most major indexes saw upward movement, notably the S&P 500 Index, which hit a milestone by surpassing 5,000 for the first time. However, the market’s gains were primarily concentrated, with an equally weighted version of the S&P 500 significantly lagging behind its market-weighted counterpart for the fourth time in five weeks. Limited economic data may have influenced this narrowness, prompting investors to focus more on individual companies’ earnings reports. Mid-week, market momentum increased, possibly due to positive reception towards the U.S. Treasury Department’s successful $42 billion auction of 10-year notes, easing concerns about rising borrowing costs. Small-cap stocks recovered later in the week despite continued weakness in biotechnology and regional bank shares. Over the last seven days, the TSX has dropped 1.4%, driven by losses in the materials and energy sectors of 4.1%. While the price of oil rose 5.6% in the last five days, equities have yet to follow suit as investors are pessimistic about the Canadian Oil and Gas Industry. In Europe, the STOXX Europe 600 Index ended slightly higher, driven by strong corporate earnings, but expectations of prolonged higher interest rates tempered gains. Italy’s FTSE MIB and France’s CAC 40 Index posted gains, while Germany’s DAX remained near record highs. However, the U.K.’s FTSE 100 Index experienced a slight decline.
Following robust U.S. gross domestic product (GDP) growth in the fourth quarter of 2023 and an impressive federal jobs report for January, Monday’s release of the Services ISM® Report On Business® data revealed positive economic indicators. The composite index surpassed expectations with a reading of 53.4 percent, driven by vigorous business activity and employment expansion. However, there was a slowdown in supplier deliveries, accompanied by increased prices. This mixed bag of economic news left some observers skeptical about the likelihood of a March interest rate cut by the U.S. Federal Reserve. While those hoping for a rate cut may need to wait, the Services PMI® data provided a pleasant surprise. Despite the typical post-holiday lull, the sector experienced accelerated growth in January, defying forecasts of a slowdown in services growth for the first quarter. Anthony Nieves, Chair of the ISM Services Business Survey Committee, remarked that growth typically picks up at the end of January but appears to arrive sooner. Key indicators within the Services PMI showed resilience:
- The Business Activity Index matched December’s figure.
- The New Orders Index increased.
- The Employment Index returned to expansion.
Although moving into expansion territory, the Supplier Deliveries Index increase was attributed partly to disruptions caused by winter weather in the U.S., drought at the Panama Canal, and attacks on cargo ships in the Red Sea. While slower supplier delivery performance can sometimes be attributed to positive economic factors, January’s index reading was influenced by external disruptions, impacting costs and schedules for global goods transportation. This turbulence contributed to increased transportation costs, reflected in the Prices Index, which experienced its largest month-over-month rise since August 2012. Persistent inflation concerns were highlighted, particularly regarding labor and other commodities such as polyvinyl chloride (PVC) components, food, and catering. Nieves emphasized the importance of monitoring these pricing trends in the context of the Federal Reserve’s interest rate policy aimed at combating inflation.1
In December, total U.S. consumer credit increased by $1.5 billion, a significant drop from the $23.4 billion gain in the previous month, according to the Federal Reserve. This translates to a 0.4% annual growth rate, down from a 5.7% increase in November. This marks the slowest pace of credit growth since a decrease in August. Economists had anticipated a $15 billion rise in consumer credit for December. Revolving credit, including credit cards, slowed to a 1% growth rate, following a substantial 16.6% increase the previous month. Nonrevolving credit, encompassing car and student loans, rose slightly by 0.2% after a 1.8% surge in the prior month. This category of credit is typically less volatile. The Fed data excludes mortgage loans, the largest category of household debt. Consumers are beginning to feel the effects of borrowing after paying down balances during the pandemic. Credit card and car loan delinquencies hit their highest levels in over a decade during the fourth quarter, as the New York Fed reported. Richmond Fed President Tom Barkin suggested that higher interest payments for consumers and businesses may lead to an economic softening later this year.2
In the first week of February, the number of Americans applying for unemployment benefits decreased by 9,000 to 218,000, indicating a continuation of remarkably low layoffs. This decline followed a three-month high of 227,000 in the previous week. As the holiday season fluctuations subside, new jobless claims return to a more normal pattern. Despite a slight cooling, the labor market remains strong, with businesses showing a preference for retention over hiring, according to Tom Barkin, president of the Richmond Federal Reserve. Economists had forecasted new claims to reach 220,000. Although hiring has slowed compared to last year, businesses are reluctant to lay off workers due to a tight labor market and a growing economy. The potential for a Federal Reserve interest rate cut later in the year could further bolster the labor market. Regarding key details, new jobless claims decreased in 42 of the 53 states and territories reporting. In contrast, the number of people collecting unemployment benefits from all programs in the U.S. declined by 23,000 to 1.87 million. However, continuing claims hit a three-month peak in late January, suggesting a lengthier job search for individuals. Unadjusted figures also showed a welcome decline in initial jobless claims compared to the same week in 2023, totaling 232,727. 3
The Congressional Budget Office (CBO) estimates that the U.S. budget deficit for the current year will be slightly smaller than last year, at around $1.6 trillion compared to $1.7 trillion in 2023. However, the deficit will continue rising in the longer term, reaching $2.6 trillion by 2034. Key details include the CBO’s projections being smaller than previous estimates made in May 2023, primarily due to Congress passing a bill in June that imposed spending limits. The agency anticipates revenues to outpace spending in 2026 and 2027, causing the deficit to shrink temporarily as a percentage of the economy, but expects spending to outpace revenues after 2027. By 2034, the deficit is forecasted to be 6.1% of gross domestic product (GDP), more significant than the 3.7% average over the past 50 years. Factors contributing to the deficit include rising net interest costs and federal healthcare costs per beneficiary. The CBO director noted that the growth of interest costs accounts for a significant portion of the deficit increase from 2024 to 2034. These projections come amid the possibility of a partial government shutdown in early March, with lawmakers having recently passed a short-term funding measure to buy more time for negotiating a larger funding package. 4
President Joe Biden is expected to unveil his latest budget plan on March 11, but it will likely face obstacles in the Republican-controlled House of Representatives.
| WK | Year to Date | |
| Dow | 0.04% | 2.61% |
| S&P500 | 1.37% | 5.38% |
| Nasdaq | 2.31% | 6.52% |
| S&P400 Mid-cap | 1.49% | 0.97% |
| Russell | 2.41% | -0.84% |
| TSX | -0.40% | 0.20% |
| Oil | 5.90% | 6.90% |
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.
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