In the Coming Week:
- Job openings and ADP employment report
- Retail inventories
- PCE Index and Core PCE
- Existing and new home sales
- S&P Global Flash US Manufacturing and Services PMI
- Durable goods new orders
- Fed Chairman speech from Jackson Hole
Equity markets finished the week mixed. Investors responded to conflicting indicators about the economy and monetary policy. Growth stocks outperformed value shares, boosted by NVIDIA’s impressive earnings and revenue performance in the artificial intelligence chip sector. However, financials faced a decline earlier in the week following S&P Global’s credit rating downgrade of five regional banks. The downgrade, influenced partly by commercial real estate lending challenges, contributed to the financial sector’s retreat. In Canada, the increase in credit loss provisions by Royal Bank and TD in their latest earnings reports supported the notion of consumer difficulties in future quarters.
On Tuesday, the National Association of Realtors reported the U.S. housing market experienced a 2.2% decline in July existing home sales compared to the previous month. The seasonally-adjusted annual rate for July’s existing home sales was 4.07 million. However, sales were significantly weaker, showing a 16.6% drop from July 2022. The median price for all housing types reached $406,700 – a 1.9% increase from a year ago. Regionally, three of four regions saw price growth compared to the previous year. The Northeast had the highest gain with 5.5%, followed by the Midwest with 3.9% growth. The South’s prices increased by 1.7%, while the West remained flat. Inventory of unsold listings increased by 3.7% from the previous month, totaling 1,110,000 homes for sale. However, this marked a 14.6% decrease from July 2022. The current sales pace would deplete this inventory in 3.3 months – below the desired 6-month pace. All four regions had double-digit declines in sales compared to a year ago, with the Northeast experiencing the most significant drop at 23.8%. The South led in national sales share at 45.7%, while the Northeast had the smallest share at 11.8%. Single-family home sales decreased by 1.9%, while condominium sales plummeted by 4.5% compared to the previous month. Median sales prices for single-family homes and condos increased by 1.6% and 4.5%, respectively, from July 2022.1
On Wednesday, the Commerce Department reported new home sales in the U.S. saw a 4.4% increase in July, as buyers turned to home builders due to limited inventory of previously-owned homes. The Commerce Department reported a seasonally-adjusted annual rate of 714,000 new home sales – up from a revised 684,000 in the prior month. This surge, exceeding Wall Street predictions, was led by a substantial rise in the Midwest and a 21.5% increase in the West. Despite this, sales fell in the Northeast and South. The median sales price of new homes rose to $436,700 from $415,400 the previous month, while the supply of new homes dropped by 2.7% between June and July, representing an 8-month supply. Although new home sales have risen 31.5% compared to the previous year, concerns are emerging, as mortgage rates rise, and potential buyers face affordability constraints.2
Also on Wednesday, the S&P Global Flash US PMI Composite Output Index for August measured 50.4, down from July’s 52.0, marking the slowest increase in activity since February. The U.S. economy is likely headed for significant third-quarter growth, according to gross domestic product, but other indicators point to a slowdown. The S&P Global Flash U.S. Services-Sector Index dropped to a six-month low of 51 in August from July’s 52.3, hinting at a decline in the service-heavy sectors like healthcare, retail and hospitality. The Manufacturing Index also slipped from 49 to 47, remaining in negative territory. Manufacturing and services saw a contraction in new orders, signaling weakening demand. Despite higher labor costs and material prices, firms were reluctant to raise customer prices due to competitive pressures. The service sector, responsible for most of the growth, has shown a faltering momentum, while manufacturers, apart from carmakers, struggled due to shifting consumer demand toward services. Although the economy has managed to avoid recession, a slowdown is indicated in the near term, possibly due to high prices and rising interest rates affecting demand. S&P Global surveys, early monthly indicators of economic health, have consistently depicted a weaker economy than other metrics.3
On Thursday, the Department of Labor reported the number of Americans filing for unemployment benefits for the week ending August 18 decreased by 10,000 to reach a three-week low of 230,000, underlining the ongoing strength of the labor market. The drop from the revised 240,000 claims in the previous week highlights the resilience of the U.S. economy despite the typically low number of job losses seen in a strong economy. The number of individuals collecting unemployment benefits from all programs dropped by 9,000 to 1.72 million, suggesting that laid-off workers are quickly finding new employment. While hiring has slowed, the robust labor market is expected to support the economy as long as consumer spending remains strong. However, a decline in spending could lead to more layoffs and pose risks to the economy’s stability.4
In July, orders for all durable goods in the U.S. fell by 5.3%. New orders increased by 0.5%, excluding transportation, marking the third consecutive monthly rise. This trend suggests stabilization in the struggling industrial sector of the economy if the volatility related to Boeing is discounted. When excluding transportation (automobiles and planes), which often distorts manufacturing data due to Boeing’s fluctuating orders, a better picture of the health of manufacturing emerges. Core orders, considered a proxy for broader business investment, increased by 0.1% in July, excluding defense and transportation. Orders for commercial planes spiked by 71% in June but dropped by 44% in July, contributing to the wide variance in headline numbers over the past two months. Orders for new cars increased by 0.8% in July. Although business investment has slightly outpaced last year’s pace, it has weakened considerably, with manufacturers remaining cautious due to rising interest rates, persistent inflation and changing consumer spending patterns. The durability of this stabilization could depend on future interest rate trends, as higher borrowing costs typically impede economic growth, business spending and investment.5
On Friday, the University of Michigan Surveys of Consumers reported consumer sentiment in the U.S. remained close to a two-year high in August, but concerns about the economy’s future grew more prominent. The final reading of the sentiment survey for August dropped to 69.5 from the preliminary figure of 71.2, which had reached a 22-month high in July. This survey assesses how consumers feel about their personal finances and the broader economy. Details show that the gauge measuring current economic conditions stood at 75.7 at the end of August, down from the preliminary reading of 77.4. The measure gauging expectations for the next six months also decreased to 65.5 from earlier readings, indicating growing uncertainty. Americans expect inflation to average 3.5% next year, a slight increase from previous months. While the U.S. experiences steady economic growth, low unemployment and manageable inflation, higher interest rates are anticipated to dampen the economy’s momentum and could potentially lead to increased unemployment. Looking forward, the survey’s director, Joanne Hsu, noted that consumers perceive that the economy’s rapid improvements over the past three months have tapered, particularly regarding inflation, contributing to their tentative outlook for the future.6
In his speech at the Jackson Hole retreat on Friday, Federal Reserve Chair Jerome Powell expressed uncertainty about the need for further interest rate hikes. Powell highlighted the “cloudy” economic outlook and emphasized the Central Bank’s cautious approach, relying on incoming data to guide policy decisions. Powell reiterated the Fed’s commitment to achieving the 2% inflation target, dismissing calls to raise it. He acknowledged the recent benign inflation readings but stressed the need for sustained efforts to attain the target.
Powell indicated the potential for additional rate hikes if economic growth persists above-trend, which could risk inflation. He also noted the labor market’s softening, suggesting that strengthened labor conditions might necessitate rate increases. Factors like rising long-term bond yields and stricter bank lending standards contributed to tighter financial conditions, affecting economic growth.
Powell acknowledged the uncertainty of the full effects of the Fed’s previous rapid monetary tightening, citing potential drag in the pipeline. He acknowledged the challenges in balancing excessive and inadequate monetary tightening risks in the current uncertain environment.
Analysts found Powell’s stance on inflation and policy more hawkish than expected. Powell’s speech suggests that the Fed will closely monitor economic data while navigating the complexities of managing monetary policy during ambiguous economic conditions.7
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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