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? - 21 January 2022
Wells Fargo Economics & Financial Report / Jan 24, 2022
The Texans have earned a top draft position yet again, the Cowboys are home again for the remainder of the playoffs, and inflation concerns that continue to mount, along with ongoing supply chain disruptions, are weighing on homebuilder confidence.
This Week's State Of The Economy - What Is Ahead? - 11 August 2023
Wells Fargo Economics & Financial Report / Aug 15, 2023
During July, both the headline and core Consumer Price Index (CPI) rose 0.2%. On a year-over-year basis, the core CPI was up 4.7% in July. Recent signs have been more encouraging, with core CPI running at a 3.1% three-month annualized pace.
This Week's State Of The Economy - What Is Ahead? - 31 January 2020
Wells Fargo Economics & Financial Report / Feb 01, 2020
Mexico’s economy has slowed notably over the last year, with the economy contracting again in Q4, indicating a full-year contraction for 2019.
This Week's State Of The Economy - What Is Ahead? - 20 January 2023
Wells Fargo Economics & Financial Report / Jan 20, 2023
The housing sector has borne the brunt of the Fed\'s efforts to slow the economy, and this week\'s data showed the industry continues to reel.
This Week's State Of The Economy - What Is Ahead? - 22 November 2019
Wells Fargo Economics & Financial Report / Nov 23, 2019
Minutes from the October FOMC meeting indicated the Fed is content to remain on the sidelines for the rest of this year as the looser financial conditions resulting from rate cuts at three consecutive meetings feed through to the economy.
This Week's State Of The Economy - What Is Ahead? - 18 November 2022
Wells Fargo Economics & Financial Report / Nov 21, 2022
The resiliency of the U.S. consumer was also on display, as total retail sales increased a stronger-than-expected 1.3% in October, boosted, in part, by a 1.3% jump in motor vehicles & parts and a 4.1% rise at gasoline stations.
This Week's State Of The Economy - What Is Ahead? - 24 March 2023
Wells Fargo Economics & Financial Report / Mar 29, 2023
The FOMC hiked the federal funds rate by 25 bps on Wednesday amid continued strength in the labor market and elevated inflation.
This Week's State Of The Economy - What Is Ahead? - 12 May 2023
Wells Fargo Economics & Financial Report / May 17, 2023
In April, the CPI rose 0.4% on both a headline and core basis, keeping the core running at a 5.1% three-month annualized rate. However, details pointed to price growth easing ahead.
This Week's State Of The Economy - What Is Ahead? - 03 February 2023
Wells Fargo Economics & Financial Report / Feb 04, 2023
During January, payrolls jumped by 517K, the unemployment rate fell to 3.4% and average hourly earnings rose by 0.3%. The FOMC raised the fed funds target range by 25 bps to 4.5%-4.75% this week.
This Week's State Of The Economy - What Is Ahead? - 09 April 2020
Wells Fargo Economics & Financial Report / Apr 10, 2020
The Federal Reserve announced a series of measures this morning that are intended to assist households, businesses and state & local governments as they cope with the economic fallout of the COVID-19 outbreak.
