Overview: Over the past week, investor expectations for future economic growth increased substantially, due to yet another stronger than expected economic report. Following the powerful labor market data at the beginning of the month, consumer spending posted an additional upside surprise this week. Since stronger growth increases future inflationary pressures, mortgage rates moved higher.
Despite numerous headwinds such as higher prices and credit card rates, consumer spending has continued to exhibit surprisingly few signs of slowing. In September, retail sales rose 0.4% from August, above the consensus forecast of 0.3%. To get a better sense of the underlying trend, investors also look at the results after removing the auto component, since it tends to be very volatile from month to month. Retail sales excluding autos increased 0.5% from August, far above the consensus forecast of just 0.1%. Following the strong report, investors scaled back their expectations for more Federal Reserve rate cuts this year.
In the housing sector, sales of existing homes in September fell a little from August to the lowest level since October 2010. The median existing-home price of $404,500 was up 3% from last year at this time. Inventories were still at historically low levels, standing at just a 4.3-month supply nationally, far below the 6-month supply that is typical in a balanced market. The trend moved in a favorable direction, though, as inventories were 23% higher than a year ago.
The latest home building data was somewhat encouraging. In September, overall housing starts fell slightly from August, as expected, but the weakness was entirely due to multi-family units. Single-family housing starts beat expectations with an increase of 3% to the highest level in five months. Single-family building permits, a leading indicator of future construction, also rose more than forecasted.
As expected, the European Central Bank (ECB) on Thursday reduced benchmark interest rates by 25 basis points to 3.25%, its third cut this year. The statement released after the meeting continued to stress that future monetary policy decisions will be based on incoming economic data. According to the statement, progress on bringing down inflation is “well on track” and officials expect to achieve their target next year. Investors anticipate that there will be one more 25 basis-point rate cut by the ECB before the end of this year.
Retail Sales (% change)
Week Ahead
Oct. 24
New-Home Sales report
Oct. 30
Q3 gross domestic product (GDP)
Oct. 31
Personal Income and Outlays
Personal Consumption Expenditures (PCE) Price Index
Nov. 1
Employment Report
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