What We Are Watching This Week:
- U.S. Leading Indicators data
- Existing Home Sales data
- Consumer Sentiment report
- S&P Flash U.S. Services and Manufacturing PMI expected
Highlights From Last Week:
- Consumer Price Index remains unchanged.
- Producer Price Index dropped.
- U.S. Retail Sales
- Industrial Production
The S&P 500 Index surged above 4,500 for the first time since September, extending gains from the past two weeks. The week saw broad-based advances, with an equally weighted version of the S&P 500 outperforming the market-weighted version by 1%. The Russell 1000 Value Index outpaced its growth counterpart and moved into positive territory for the year. Small-cap indexes also performed well. Investors shifted their focus from third-quarter earnings to macroeconomic factors, while solid retail results offered insights into consumer health. The TSX followed U.S. equity indexes despite oil falling 1.6% in the week. The STOXX Europe 600 Index surged by 2.82% in local currency terms, driven by increasing expectations of central banks cutting interest rates. Major European stock indexes also experienced substantial gains, with Germany’s DAX rising by 4.49%, Italy’s FTSE MIB by 3.49%, France’s CAC 40 Index by 2.68% and the U.K.’s FTSE 100 Index by 1.95%.
In October, the cost of living in the United States remained unchanged, primarily due to lower gasoline prices, offering some relief in the ongoing battle against inflation. The latest reading marked the smallest increase in 15 months, defying expectations of a 0.1% rise in the CPI, as predicted by economists. Over the past year, the inflation rate eased from 3.7% to 3.2%, but core consumer prices, excluding food and gas, increased by 0.2%. The Federal Reserve considers the core rate a better indicator of future inflation trends. While the annual increase fell slightly to 4%, the core rate remained stubbornly around 4% – twice the Fed’s 2% target. This soft inflation data might influence the Fed to maintain interest rates at their current levels during its upcoming December meeting. However, the Central Bank is still eager to see a further price decline, particularly the core rate, to prevent further rate hikes. Gasoline prices dropped significantly by 5.3%, offsetting the flat CPI reading. Food costs rose by 0.3%, contributing to household financial stress, with grocery prices up 5% over the past year. Shelter costs increased by 0.3%, but rents surged by 0.5% in the month and 7.2% annually. Medical expenses also increased by 0.3% due to changes in government calculations, potentially impacting inflation in the coming year. Despite some relief, the Fed remains cautious, acknowledging that inflation may not be entirely under control, and its rate decisions will hinge on future developments.1
In October, the U.S. Producer Price Index (PPI) declined by 0.5%, the largest drop since April 2020, according to the Labor Department. This decrease came as a surprise to economists who had anticipated a 0.1% increase. The Core Producer Price Index, which excludes volatile food, energy prices and trade services, rose by a modest 0.1% – down from a 0.3% gain in the previous month. Over the past year, the headline PPI increased by 1.3% in October – down from 2.2% in the last month, while core prices were up 2.9% compared to 3% in October the previous year. Notably, the cost of goods fell by 1.4% in October, and energy prices decreased by 6.5%, contributing to the overall decline in PPI. Wholesale food prices also fell by 0.2%. Services costs remained flat for the first time in six months. This data suggests subdued price pressures and supports the idea of a “soft landing” in the economy, with the possibility of no further interest rate increases from the Federal Reserve.2
U.S. retail sales fell by 0.1% in October, marking the first decline in seven months, but it is likely a temporary setback, as the holiday shopping season approaches. Economists had expected a 0.2% drop. Auto dealers saw a 1% decline, impacting the overall figures, as auto sales account for about 20% of retail sales. Gasoline station receipts also slipped due to lower gas prices and reduced demand post-summer. Excluding auto and gas sales, retail sales showed a modest 0.1% increase, reflecting continued consumer demand. While consumer spending is expected to slow due to higher borrowing costs and lingering inflation concerns, rising wages and low unemployment may sustain spending, even though the holiday season is forecasted to be the softest in five years. Consumer spending plays a significant role, driving around 70% of the U.S. economy.3
The number of Americans filing for unemployment benefits reached a three-month high at 231,000, rising by 13,000 from the previous week’s revised figure of 218,000. This suggests a slight cooling in the robust U.S. labor market, as businesses hire less. Although job losses remain low, the labor market shows signs of softening. Economists had expected 222,000 new claims. Continuing claims, which indicate the time taken to find new jobs, increased for the eighth consecutive week to a seven-month high of 1.83 million, marking a lengthier job search for some individuals. Typically, unemployment claims surge above 300,000 during recessions.4
The Federal Reserve reported on Thursday that October industrial production in the United States declined by 0.6%, with manufacturing output dropping by 0.7%. The significant decline in manufacturing was primarily attributed to a 10% decrease in the production of motor vehicles and parts, impacted by strikes at major automakers. Excluding motor vehicles and parts, manufacturing output increased by 0.1%. Additionally, the utility sector’s production decreased by 1.6%, while the mining sector saw a 0.4% increase. Compared to the previous year, total industrial output in October was 0.7% lower. Capacity utilization also decreased by 0.6% points to 78.9% in October, which is 0.8% points below the long-term average from 1972 to 2022.5
U.S. economic data are currently in a balanced state, neither too hot nor too cold, which has driven domestic and U.S. stocks to a two-month high and moved past the October correction. Progress in managing inflation is evident, with the U.S. Core CPI reaching its lowest level in two years. This, and a cooling labor market, suggest that the Federal Reserve (Fed) and Bank of Canada (BoC) may step back and consider rate cuts, possibly in the latter half of the next year. This situation presents an opportunity for underperforming equity markets to catch up and for bonds to recover, as the pressure of rising yields gradually diminishes. While a growth slowdown could introduce volatility, the overall fundamentals support a positive outlook for 2024.
Sources:
1 https://www.bls.gov/news.release/cpi.nr0.htm
2 https://www.bls.gov/news.release/ppi.nr0.htm
3 https://www.census.gov/retail/marts/www/marts_current.pdf
4 https://www.dol.gov/ui/data.pdf
5 https://www.federalreserve.gov/releases/g17/current/default.htm
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 Investment Industry Regulatory Organization of Canada (IIROC) 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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