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Weekly Update 11/18/2022: Inflation Shows Further Signs of Easing

  • Walmart releases earnings solidly beating expectations and raises guidance
  • Disney film Black Panther: Wakanda Forever takes in $330 million globally to set November opening weekend record
  • Accenture announces the acquisition of Japanese data science company ALBERT Inc.
  • Microsoft unveils software that will help customers track and coordinate supply-chain systems

Domestic Economic News


We had further welcome news this week on the inflation easing front. US producer price growth stepped down in October by more than expected in the latest sign that inflationary pressures are beginning to ease. The producer price index for final demand advanced 8% from a year ago, the smallest annual gain in more than a year, and 0.2% from month earlier, Labor Department data showed Tuesday. The median estimates in a Bloomberg survey of economists called for a 8.3% annual increase and a 0.4% rise from the prior month. The S&P 500 opened higher and Treasury yields eased, while the Bloomberg dollar index declined after the report. Excluding the volatile food and energy components, the so-called core PPI was unchanged in October and rose 6.7% on an annual basis. The data come on the heels of a smaller-than-expected monthly increase in the October consumer price index, which investors and Wall Street welcomed as a sign that the fastest price increases in decades are finally be starting to ebb. After peaking in March at 11.7% on an annual basis, producer price growth has moderated amid improving supply chains, softer demand and a weakening in many commodities prices. Excluding food and energy, costs of goods declined during the month, and services prices fell for the first time since 2020. The Federal Reserve, which is watching all inflation data closely, is anticipated to soon slow the pace of interest rate hikes, though officials have emphasized they remain firmly committed to taming inflation. Many companies have successfully passed on much, if not all, of the increases in input and labor costs to consumers, but some companies have recently indicated a hesitation to pursue further aggressive price hikes amid the uncertain economic environment.

US retail sales posted the biggest increase in eight months in October, indicating demand for goods is broadly holding up despite decades-high inflation and a worsening economic outlook. The value of overall retail purchases climbed 1.3% last month after stagnating in September, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales were up 0.9%. The figures aren’t adjusted for inflation. The median estimate in a Bloomberg survey of economists called for a 1% increase in total retail sales. Nine of 13 retail categories rose last month, according to the report, including firm results at auto dealers, grocery stores and restaurants. The value of sales at gas stations climbed 4.1%, mostly reflecting higher pump prices. The data illustrate that consumers are continuing to prove largely resilient and suggests the economy got off to a good start in the fourth quarter. That may complicate the argument posed by several Federal Reserve officials pushing for a slower pace of interest-rate hikes in the coming months, but policymakers acknowledge that inflation is still far too high.

US mortgage rates fell last week by the most since the end of July, slipping below 7% and helping generate a bounce in purchase applications that otherwise remain depressed. The contract rate on a 30-year fixed mortgage decreased 24 basis points to 6.9% in the week ended Nov. 11, according to Mortgage Bankers Association data released Wednesday. The group’s index of applications to buy a home rose 4.4% -- the most since June -- but is still near the weakest level since 2015. The pickup in demand allowed the overall measure of mortgage applications, which includes refinancing, to rise for the first time in two months. The index of refinancing activity, however, fell to a fresh 22-year low. The rate-sensitive housing market has deteriorated rapidly this year as the Federal Reserve tightens monetary policy to help reduce inflation. After consumer and producer price growth in October both eased by more than forecast, some policymakers are pushing for a slower pace of interest-rate hikes in the coming months. Still, they acknowledge that inflation is far too high. The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75% of all retail residential mortgage applications in the US.


US homebuilder sentiment weakened in November by more than forecast, hitting the lowest level in a decade when excluding the immediate onset of the pandemic. The National Association of Home Builders/Wells Fargo gauge decreased 5 points to 33 this month, figures showed Wednesday. The median estimate in a Bloomberg survey of economists called for a reading of 36. Sentiment has fallen every month this year, extending what was already the longest stretch of declines in data back to 1985. The housing market, which is especially susceptible to higher borrowing costs, has been among the first sectors to feel the impact of the Federal Reserve’s tightening campaign. “Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” NAHB Chairman Jerry Konter said in a statement. New US home construction continued to decline in October as builders contend with a sharp retrenchment in housing demand. Residential starts decreased 4.2% last month to a 1.43 million annualized rate after an upward revision to the prior month, according to government data released Thursday. Single-family homebuilding dropped to an annualized 855,000 rate, the lowest since May 2020. Applications to build, a proxy for future construction, fell to an annualized 1.53 million units. Permits for construction of one-family homes dropped as well, also the lowest since the early months of the pandemic. The median estimates in a Bloomberg survey of economists called for a 1.41 million pace of residential starts and 1.51 million pace for total permits.

US factory output rose in October by less than expected after downward revisions to prior months, suggesting manufacturing is losing some steam as domestic and global demand moderates. The 0.1% increase in factory production last month followed a downwardly revised 0.2% advance in September, according to Federal Reserve data released Wednesday. Including mining and utilities, total industrial output fell 0.1% in October, the second decline in three months. Manufacturing output was supported by motor vehicles as well as electrical equipment and aerospace transportation. Excluding autos, factory production stagnated, the weakest print in four months. Nondurable manufacturing declined for the first time since June, dragged down by petroleum products and textiles. With concerns brewing about next year’s demand environment as Fed policy makers ratchet up interest rates, the outlook is tenuous for manufacturers. Higher borrowing costs, which have already taken a toll on home construction, risk diminishing capital spending appetites in other sectors as recession fears mount. Factory orders may also continue to weaken as many retailers look to reduce an inventory overhang. The median forecast in a Bloomberg survey of economists called for a 0.2% increase in factory output and a 0.1% rise in industrial production. October industrial production figures add to a growing ensemble of data flagging softening core-goods inflation ahead, a plus for Fed officials looking to step down the pace of rate hikes. That said, with a tight labor market and robust services-price inflation accounting for the bulk of underlying momentum, the IP print isn’t a game-changer for the near-term policy outlook.

Applications for US unemployment insurance unexpectedly fell slightly last week and remained near historic lows, showcasing the strength of the labor market as other parts of the economy cool. Initial unemployment claims dropped by 4,000 to 222,000 in the week ended Nov. 12, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for 228,000 new applications. Continuing claims rose by 13,000 to 1.51 million in the week ended Nov. 5, the fifth straight increase. If the upward trend is sustained, that could be a sign that an increasing number of Americans are out of work for longer.


Interest Rate Insight and the Fed


There were plenty of fed speakers out with comments this week and below is a synopsis of those comments. One of our favorite professors at The Wharton School would have been pleased with the diversity of opinion that came out from various officials this week!

Treasuries fell across the curve on Monday and the dollar strengthened against most of its major peers after Federal Reserve Governor Christopher Waller pushed back on bets the US central bank was nearing the end of its hiking cycle, while traders were also on alert for a scheduled appearance by his colleague Lael Brainard. Benchmark 10-year Treasury yields climbed as much as nine basis points to 3.90% as trading kicked off again after a public holiday Friday, before moving to around 3.88% in New York morning trading. Waller said the Fed has got a ways to go before its stops hiking and the market got “way out in front” over the unexpected cooling in inflation last week. A gauge of the greenback rose as much as 0.6% before shifting to be up around 0.4% on the day. “Easier financial conditions risk undoing the Fed’s work to bring inflation sustainably down to target, so it is not surprising to see officials push back a bit,” Goldman Sachs Group Inc. analysts including Isabella Rosenberg wrote in a client note. 

The dollar’s advance comes after a gauge of the currency slid 3.5% last week, its biggest decline since the early days of the pandemic, as traders trimmed bets on aggressive Fed hikes after US inflation was slower in October than economists forecast. Treasury yields also tumbled and stocks surged amid optimism the Fed wouldn’t need to increase rates as much as anticipated. US two-year yields -- among the most sensitive to changes in monetary policy -- climbed as much as 10 basis points to 4.43%, after sliding 33 basis points last week. German and UK 10-year yields fell 4 basis points to 2.12% and 4 basis points to 3.31% respectively, paring some of Friday’s advance. Fed speakers this week pushed back on last week’s market reaction as they want to tighten financial conditions, not loosen them, Commonwealth Bank of Australia strategists wrote in a note to clients. The dollar can partly unwind last week’s decline as they were out of proportion to the size of the miss in inflation, they said.


Federal Reserve Vice Chair Lael Brainard said the time was soon coming for the central bank to moderate the size of its interest-rate increases, while stressing that it was not yet ready to pause. “It will probably be appropriate soon to move to a slower pace of increases,” Brainard said Monday in a fireside-chat event at Bloomberg’s Washington bureau. “But I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do.” The US central bank has raised its benchmark interest rate from nearly zero in March to a target range of 3.75% to 4% this month in a bid to slow the economy and bring inflation down from four-decade highs. The most aggressive tightening campaign since the 1980s has included rate hikes of three-quarters of a percentage point at each of the last four policy meetings, triple the usual move. Investors now expect Fed officials to opt for a smaller, half-point hike at their Dec. 13-14 meeting following a signal from Chair Jerome Powell on Nov. 2 that such a downshift was in the offing, and a subsequent Labor Department report on Nov. 10 which showed increases in US consumer prices may be starting to moderate. Inflation cooled by more than expected in October, with the consumer price index rising 7.7% from a year earlier versus 8.2% the month before. But officials have stressed that they need to see a series of lower monthly readings to have confidence that price pressures are heading back down to levels consistent with the central bank’s 2% target. “The most recent CPI inflation print suggests that maybe the core PCE measure that we really focus on might be also showing a little bit of a reduction,” Brainard said. “That would be welcome.” Officials in September forecast rates would reach 4.6% in 2023, but Powell on Nov. 2 suggested projections for the so-called terminal rate would probably move higher when they are next updated at the December meeting. Investors now see rates peaking just below 5% by the middle of next year.

Federal Reserve Bank of Philadelphia President Patrick Harker said he expects officials to slow the pace of their interest-rate increases as monetary policy approaches a sufficiently restrictive level. “In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance,” Harker said Tuesday in prepared remarks to the Global Interdependence Center in Philadelphia. Sometime next year, “I expect we will hold at a restrictive rate for a while to let monetary policy do its work.” The comments echoed Harker’s speech on Nov. 10. The US central bank raised its benchmark interest rates by 75 basis points on Nov. 2 for the fourth straight time, lifting the target range to 3.75% to 4% from near zero in March as it fights to curb the highest inflation in four decades. The tightening campaign is the most aggressive since the 1980s and several Fed officials have begun suggesting that the moment to moderate is growing near, while stressing that this won’t signal an end to rate hikes. Investors now expect Fed officials to downshift to a half percentage-point hike at their Dec. 13-14 meeting after milder-than-expected consumer inflation last month provided hope price pressures are starting to ease. On the other hand, rate hikes have yet to cool the hot US labor market. Employers added 261,000 new jobs in October while unemployment at 3.7% remains low -- helping support consumer confidence and spending. Harker said there are signs that the economy is starting to decelerate, even as the job market remains hot. “Credit card purchase data indicate that consumer spending, which comprises around 70% of economic activity in the United States, is slowing, with services and retail leading the decline,” he said. “Investment in housing has weakened, and even the boom in manufacturing, which has buoyed the economy, is starting to wane.”


Federal Reserve Bank of Atlanta President Raphael Bostic said that while there have been some positive recent signs that inflation may be slowing, more work is still needed by policymakers to get interest rates to a restrictive level. “There are glimmers of hope,” Bostic said in an essay posted on the Atlanta Fed Website Tuesday, citing signs including slowing increases in goods prices. “I will need to see indicators of broad-based easing of inflation.” The US central bank raised its benchmark interest rate by 75 basis points on Nov. 2 for the fourth straight time, lifting the target range to 3.75% to 4% from near zero in March as it fights to curb the highest inflation in four decades. While Bostic didn’t comment specifically on the December policy meeting, markets broadly expect a half-point hike next month. Bostic highlighted that he wants to see slowing in the price gains of services as well as goods. “So far, we haven’t,” he said, adding that the key may be a better balance in the labor market, because service industries are labor intensive. But for now, “the labor market remains tight as openings still far exceed the number of job seekers. That creates upward pressure on wages,” he said.

Data released last week showed consumer prices cooled by more than expected in October, with the consumer price index rising 7.7% from a year earlier versus 8.2% the month before. Bostic said the goal of monetary policy is to be “sufficiently restrictive to return inflation to our target,” adding that “we are not there now, and so I anticipate that more rate hikes will be needed.” Bostic noted that the Fed’s policy committee added to its most recent statement a comment that monetary policy works with a lag. He said that the precise lag between policy action and impact on prices is uncertain and that by some estimates it could be “18 months to two years” to bring down inflation. That means the Fed will need to “calibrate policy today knowing we won’t see its full impact on inflation for months. In those circumstances, we must look to economic signals other than inflation as guideposts along our path.” Bostic reiterated his view that he doesn’t believe a recession is inevitable. He said inflation was the top priority, in any event. “If high inflation persists for too long and becomes entrenched in the economy, we know that more prolonged and deeper economic pain will ensue,” Bostic said. “So, while there are risks that our policy actions to tame inflation could induce a recession, that would be preferred to the alternative.”


Pouring water on market optimism early Thursday, Federal Reserve Bank of St. Louis President James Bullard urged policymakers to raise interest rates further, saying the level will need to be higher to meet the central bank’s goal to be “sufficiently restrictive” to bring down inflation. Immediately after his comments stock and bond futures declined. “Even under these generous assumptions, the policy rate is not yet in a zone that may be considered sufficiently restrictive,” Bullard said Thursday in Louisville, Kentucky at an event hosted by Greater Louisville Inc. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.” Bullard presented charts showing a sufficiently restrictive rate might be between about 5% and 7%, though he didn’t spell out in his prepared remarks what rate level he favored. The calculation used different versions of a Taylor Rule, a popular monetary policy guideline developed by Stanford University’s John Taylor. That compares with the current 3.75% to 4% target level of the Fed’s benchmark rate, which it reached earlier this month. The St. Louis Fed leader, who has been among the more hawkish of policy makers this year, was the latest central banker to call for additional action. The Fed raised rates by 75 basis points on Nov. 2 for the fourth straight time as part of its most aggressive tightening since the 1980s to curb an inflation rate at a four-decade high. “Thus far, the change in the monetary-policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023,” he indicated. Bullard in his prepared comments didn’t say whether he would favor a 50 or 75 basis-point move at the Fed’s Dec. 13-14 meeting. A number of his colleagues have called for a downshift in the size of the next rate increase following last week’s consumer price report, which showed a softening in core consumer goods inflation. “It is possible that increased financial stress could develop,” Bullard said. However, the transparency with which these policy rate increases have been delivered, along with forward guidance, “seems to have allowed for a relatively orderly transition to a higher level of interest rates so far,” he said. Bullard said the St. Louis Fed’s financial stress index is so far indicating a relatively low level of financial stress, despite the sharp increase in rates this year.


Taking a softer tone on Friday and lifting sentiment in early trading for markets, Federal Reserve Bank of Boston President Susan Collins didn’t specify in her remarks what size rate move she would support at the December meeting, but has previously said that all increments for rate increases should be on the table and that the risks of overtightening are increasing as the Fed raises rates. She reiterated in her remarks that she remains “optimistic that there is a pathway to reestablishing price stability with a labor market slowdown that entails only a modest rise in the unemployment rate.” Collins was speaking at a conference dedicated to examining shifts in the labor market and the potential impact of long-run implications from the pandemic.


We will stop there as the message at mid-week from fed members seemed to be relatively consistent combatting inflation is the top priority while being careful they do not go too far with interest rate hikes given there can be a lag in terms of the impact on the broader economy.


Impactful International News


Joe Biden and Xi Jinping agreed to a series of goodwill gestures intended to improve ties between their countries after the first in-person meeting between the leaders of the US and China since the pandemic began. The two men met for about three hours on the sidelines of the Group of 20 summit in Bali, Indonesia, greeting each other with a handshake and conciliatory remarks in which they both called for calming tensions. “Good to see you,” Biden said to Xi before they joined US and Chinese officials. The two sides sat at long conference tables with a display of flowers between them. The White House said in a statement afterward that Secretary of State Antony Blinken would travel to China, in a sign of a thaw. The US will work with China to organize a visit tentatively planned for early next year, according to a senior State Department official. The countries will also resume talks between senior officials on issues including climate change, economic stability and debt relief, and health and food security, according to the White House and a statement from China’s Ministry of Foreign Affairs. Any thawing of tensions is a positive catalyst for global stock and bond markets as the two countries represent the two largest economies in the world.


Biden said Xi was “direct and straightforward” in their meeting, and -- in another sign of progress in the relationship -- declared that there was no “imminent” threat that China will invade Taiwan, the self-governed island that’s become the biggest flashpoint between Beijing and Washington. “I absolutely believe there need not be a new Cold War,” Biden said at a news conference at his hotel in Bali. In another key point of agreement between them, Biden and Xi said that “a nuclear war should never be fought” and that they oppose “the use or threat of use of nuclear weapons in Ukraine,” according to the White House statement. Xi and the Chinese government have been reticent to publicly criticize Russia for its invasion of Ukraine. But China’s foreign ministry, citing Xi, cautioned in its statement that “suppression and containment will only strengthen the will and boost the morale of the Chinese people.” “Starting a trade war or a technology war, building walls and barriers, and pushing for decoupling and severing supply chains run counter to the principles of market economy and undermine international trade rules,” the statement added, referring to existing or proposed US policies. “Such attempts serve no one’s interests.” And the White House statement noted points of disagreement, saying that Biden “raised concerns about PRC practices in Xinjiang, Tibet, and Hong Kong, and human rights more broadly.” Biden told Xi that the US remains committed to its One China policy in which Taiwan is not recognized as an independent country. But he “raised US objections to the PRC’s coercive and increasingly aggressive actions toward Taiwan, which undermine peace and stability across the Taiwan Strait and in the broader region, and jeopardize global prosperity.”

China broke off many routine contacts with the US earlier this year after House Speaker Nancy Pelosi made a visit to the self-governing island. Biden’s repeated pledges that the US would defend Taiwan in the event of a Chinese attack have also alarmed Beijing. Biden and Xi each kicked off their meeting with statements that noted the imperative of peaceful relations between their countries. “We share responsibility, in my view, to show that China and the United States can manage our differences, prevent competition from becoming anything ever near a conflict, and to find ways to work together on urgent global issues that require our mutual cooperation,” Biden said. “The world expects, I believe, China and the United States to play key roles in addressing global challenges, from climate changes to food insecurity, and for us to be able to work together,” he added. “The United States stands ready to do just that, work with you -- if that’s what you desire.” Xi told Biden, “It’s good to see you.” “Currently, the China-US relationship is in such a situation that we all care a lot about it, because this is not the fundamental interest of our two countries and peoples and it’s not what the international community expects of us,” Xi said, through a translator. He said the two sides “need to find the right direction” and “elevate the relationship.” “A statesman should think about and know where to lead his country. He should also think about and know how to get along with other countries and the wider world,” Xi told Biden. “Humanity is confronted with unprecedented challenges. The world expects that China and the United States will properly handle the relationship.” Hua Chunying, a spokeswoman for China’s Foreign Ministry who was in the meeting, said Xi called on both countries to work together to avoid a collision. The success of both nations should be celebrated, she said, adding that China is committed to peaceful development. “The world is big enough for the two countries to develop themselves and prosper together,” she said on Twitter. She added: “China-U.S. relations should not be a zero-sum game where one side out-competes or thrives at the expense of the other.”


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