The economic calendar was quiet the past few days, so market participants continued to digest last week's slew of data. Retail sales, manufacturing production and residential construction all came in weaker than expected in January, while consumer and producer price inflation were stronger than expected. The combination of slowing output amid persistently elevated price growth puts the Federal Open Market Committee (FOMC) in a tough position in terms of fine-tuning monetary policy, but some of the softness in activity can be chalked up to seasonality. We suspect the Committee will stand pat at its next meeting in March to allow for more data to come through.
The economic reports released this week were mixed, but they largely leave the narrative unchanged, in our view. The Leading Economic Index (LEI) came in slightly under expectations, falling 0.4% in January. Even though consumer expectations and the new orders component of the ISM manufacturing index jumped at the beginning of the year, sentiment is rebounding from low levels after spending much of 2023 in the doldrums. Average weekly hours in the manufacturing sector nosedived in January and the yield curve remained deeply inverted. As these components are heavily weighted in the index, the monthly outturn was negative. The LEI now stands just two points above its April 2020 low (chart), which underscores the magnitude of its out-of-sync recession signal.
While the LEI continues to gesture toward tough waters ahead, the home resale market finally caught a tailwind. Existing home sales rose 3.1% in January to a 4.0 million-unit annual sales pace. The increase was widely expected as pending home sales and mortgage purchase applications perked up in December amid declining mortgage rates. The sales rebound may prove to be short-lived, however. The average 30-year fixed mortgage rate crept up 30 bps over the past few weeks to 6.9% (chart), as recent inflation data have added credence to a “higher for longer” interest rate environment.
Underpinning the move higher in mortgage rates, the minutes of the FOMC's January meeting were mildly hawkish. The Committee held its benchmark interest rate steady last month and signaled that it would not lower rates “until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” In support of that stance, the minutes revealed that “most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent.”
While we look for the core PCE deflator, the Fed's preferred measure of inflation, to have edged down in January on a year-ago basis—see U.S. Outlook for more detail—the upside surprise in the CPI is not a confidence booster in the campaign to get inflation back down to 2% on a sustainable basis. We currently forecast the first rate cut to take place in May, but the timing of that cut is at risk of slipping further into the summer.
This Week's State Of The Economy - What Is Ahead? - 10 November 2020
Wells Fargo Economics & Financial Report / Nov 17, 2020
The U.S. election has come and gone, but we have not made any meaningful changes to our economic outlook, which continues to look for further expansion in the U.S. economy in coming quarters.
This Week's State Of The Economy - What Is Ahead? - 22 May 2020
Wells Fargo Economics & Financial Report / May 25, 2020
The re-opening of the country is getting underway, with all 50 states starting to roll back restrictions.
This Week's State Of The Economy - What Is Ahead? - 20 December 2019
Wells Fargo Economics & Financial Report / Dec 21, 2019
President Trump became the third president in U.S. history to be impeached by the House, but removal by the Senate is highly unlikely. The House also passed the USMCA, which should be signed into law in early 2020.
This Week's State Of The Economy - What Is Ahead? - 15 April 2022
Wells Fargo Economics & Financial Report / Apr 18, 2022
What do pollen and the Consumer Price Index (CPI) have in common? Answer; both are hitting new highs. This week’s U.S. economic data was led by the largest month monthly increase in the Consumer Price Index (CPI) since September 2005.
This Week's State Of The Economy - What Is Ahead? - 17 April 2020
Wells Fargo Economics & Financial Report / Apr 18, 2020
Economic data from the early stages of the Great Shutdown have finally arrived, and they are as bad as feared. ‘Worst on record’ is about to become an all too common refrain in our commentary.
This Week's State Of The Economy - What Is Ahead? - 04 November 2022
Wells Fargo Economics & Financial Report / Nov 07, 2022
Employers continued to add jobs at a steady clip in October, demonstrating the labor market remains tight and the FOMC will continue to tighten policy.
This Week's State Of The Economy - What Is Ahead? - 10 March 2023
Wells Fargo Economics & Financial Report / Mar 14, 2023
Financial markets were looking for validation that January\'s unexpected strength was not a fluke and that the downward slide in economic momentum experienced late last year had stabilized.
This Week's State Of The Economy - What Is Ahead? - 07 October 2020
Wells Fargo Economics & Financial Report / Oct 10, 2020
In the immediate fallout after the lockdowns in the early stages of this pandemic, there was a lot of discussion about the shape of the recovery.
This Week's State Of The Economy - What Is Ahead? - 04 June 2021
Wells Fargo Economics & Financial Report / Jun 08, 2021
The CDC\'s relaxation of its mask mandate occurred mid-May, and as data for that month begins rolling in this week, it is evident there is no lack of demand. Supplies, on the other hand, are a worsening problem.
This Week's State Of The Economy - What Is Ahead? - 10 September 2021
Wells Fargo Economics & Financial Report / Sep 13, 2021
Data from the opening weekend of College Football indicates that we will have to endure another season of Nick Saban deification.
