Leadership Adjustment, Rising Rates

October 21, 2022

After just 45 days in office, British Prime Minister Liz Truss is stepping down from her position. In her resignation speech in Downing Street, she said,?"I came into office at a time of great economic and international instability…We set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit…I recognize, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative party."

Recall, at the start of September, Liz Truss won the race to replace Boris Johnson as U.K. Prime Minister. Shortly after her victory, the administration announced a mini budget that included a price cap on gas, with plans to spend a combined ￡130 billion over the next 18 months to cap household energy bills and lower energy bills for businesses. The budget also included ￡45 billion ($50 billion) worth of massive tax cuts.

However, with inflation already at a four-decade high in the region, the notion of further expansionary fiscal policy was met with an unfavorable investor reaction, to say the least. In fact, with the?“dysfunction”?growing in the overseas market, the Bank of England (BOE) announced plans to buy long-dated gilts and delay planned sales of debt in an effort to stabilize markets just five days after the Truss budget was unveiled. According to a statement, the BOE indicated it would carry out temporary purchases, citing?"a material risk"?to financial stability that would lead to?"an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."

More recently, however, the market volatility and?“chaos,”?as some described, forced the PM to reverse course on her proposal, undermining her leadership and forcing a resignation from office.?

Back in the U.S., tough Fed rhetoric – and relatively thinner volume – continues to put upward pressure on rates.

The 10-year Treasury yield rose to a fresh high this morning, rising 10bps to 4.33%, the highest since 2007.??

Yesterday, initial jobless claims unexpectedly fell 12k from 226k to 214k in the week ending October 15, a three-week low. Jobless claims were expected to rise to 232k, according to?Bloomberg. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.36M to 1.39M in the week ending October 8, a five-week high.

While a welcome reduction, keep in mind, the lower level is more a reflection of earlier more-elevated claims in the aftermath of Hurricane Ian than a structural change or improvement in labor market conditions.

Also yesterday, the Philly Fed Index rose slightly from -9.9 to -8.7 in October, a two-month high. According to?Bloomberg, the index was expected to rise to -5.0. In the details of the report, prices paid rose from 29.8 to 36.3, new orders increased from -17.6 to -15.9, and delivery time gained from -18.2 to -12.6 in October. Additionally, employment improved from 12.0 to 28.5, the highest reading since April. On the other hand, shipments fell to 8.6 from 8.8, and the six-month outlook dropped from -3.9 to -14.9 in October, the lowest since July.

Additionally yesterday, existing home sales declined for the eighth consecutive month, falling 1.5% from 4.78M to a 4.71M unit pace, the lowest since May 2020. According to the median estimate on?Bloomberg, existing home sales were expected to drop 2.1%. In the details of the report, single-family sales fell 0.9%, and multi-family sales dropped 5.8%. Year-over-year, existing home sales declined 23.8% in September, the fourteenth consecutive month of decline. Despite a decline in sales, the months’ supply of existing homes remained at 3.2 months for the third consecutive month, averaging 3.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 8.4% in September from a year earlier to $385k, a six-month low.

Finally on Thursday, the Leading Index fell 0.4% in September, a tenth of a percentage point more than expected and following a flat reading in August.

This morning, the economic calendar is empty.

Next week we kick off the economic calendar with a look at the Chicago Fed National Activity Index and the preliminary October readings for manufacturing and service activity on Monday. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. As of late, the index has slowed from a near-term peak of 2.26 in February of 2021 to a flat reading as of August.

On Tuesday, we will have a look at the latest housing price index. Home prices have remained stubbornly elevated at nearly 16% on a national basis as of the latest August report. Even while mortgage rates have risen from 3.22% at the start of the year to just shy of 7%, given the multi-year shortfall in terms of housing supply relative to demand, home prices could slow further, but are likely to face at least some structural support to remain in positive territory.

Also on Tuesday, we will have a look at the latest read on consumer confidence from the Conference Board followed by the University of Michigan Consumer Sentiment Index on Friday. While the economy remains broadly sluggish, the U.S. labor market appears increasingly solid. For consumers, however, the primary driver of sentiment has been inflation with rising prices at the grocery store and nearly everywhere we turn, undermining confidence in the outlook and one’s financial footing. Consumer confidence has risen more recently in the past two months to 108.0, a reflection of relatively lower prices at the pump. Such upward momentum, however, is likely to prove short-lived with October confidence projected to decline to a reading of 105.0.

On Wednesday, new home sales data from September will be released. Yesterday, existing home sales declined 1.5% in September and 23.8% on annual basis. Next week, that declining trend in activity is expected to continue. New home sales, already down 0.2% over the past year, are expected to decline by more than 12% in September. Later in the week, on Friday, pending home sales are expected to decline 5.0%.

Additionally from a broader perspective, on Thursday, we look at the overall health of the economy with the preliminary read on Q3 GDP. According to the Atlanta Fed’s GDP Now model, Q3 GDP rose 2.9%, although according to?Bloomberg, GDP rose 2.3%, with further risks to downside given a slower-than-expected pace of consumption at the end of the quarter.?

Also, with the latest GDP release, September durable goods orders are expected to rise 0.6%. Year-over-year, headline orders rose 11.2% in August, up from the 9.2% annual increase the month prior. Excluding aircraft and defense, durable orders climbed 1.3% in August and rose 9.8% in the past year.

Finally on Friday, personal income and consumption and the latest PCE reports will be released. Consumer spending rose 0.4% in August, and 8.2% year-over-year. Personal income, meanwhile, rose 0.3% last month, and 3.9% over the past 12 months. Adjusting for inflation, however, real consumer spending has failed to regain momentum after slowing to below a 2% pace with nominal wage gains remaining negative for the better part of the past year.?

After all, prices remain stubbornly elevated, with the PCE, the Fed’s preferred measure of inflation, rising 6.2% in the latest August report, down however from a peak level of 7.9% in June. The core, meanwhile, pushed higher in August rising from 4.7% to 4.9%. While prices aren’t expected to push higher from here, the headline and core are both expected to remain near a four-decade high, complicating the outlook for the Fed as monetary policy struggles to have a meaningful impact on bringing down costs.?

-Lindsey Piegza, Ph.D., Chief Economist?