The Weekly Bottom Line

Our summary of recent economic events and what to expect in the weeks ahead.

Date Published: April 19, 2024


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  • U.S. headline retail sales beat expectations in March, advancing for a second consecutive month. The strong showing bolstered the case for a delayed start to the Fed’s interest rate cutting cycle.
  • Comments from senior Federal Reserve officials has the timing of possible interest rate cuts in question amid signs of persistent strength in the U.S. economy and higher-than-anticipated inflation.
  • In contrast, the housing market continues to feel the weight of higher interest rates as housing starts and home sales dipped in March.

Dialing Back Expectations

Chart 1 is a bar graph showing monthly percent changes in U.S. total retail sales from March 2023 to March 2024. While retail spending growth declined at the start of the year, it grew above expectations in February and March.

This week featured releases on retail sales and the housing market in March. Also high on the market’s radar were comments made by the Federal Reserve Chair, which suggested the central bank may be changing its tune on the path and timing of interest rate cuts. Overall, markets responded strongly to the new information with stocks heading lower and treasury yields rising (10 year yields were up 9 basis points at time of writing) as investors recalibrated their expectations for rate cuts this year. 

A stronger-than-expected gain in retail sales in March reinforced that the U.S. economy is still strong, and is expected to lead growth among developed countries this year, according to recent IMF projections. Headline retail sales rose for a second consecutive month in March, after a string of monthly declines, with sales in the key control group acting as a driver (Chart 1). Given the soft start to the year, March’s increase just managed to lift the quarter into positive territory (up 0.2% q/q annualized). The notable uptick also represents an upside risk to our own forecast for 2024 Q1 consumer spending, and doesn’t help the Fed in its goal of taming price growth.

On Tuesday, the Federal Reserve Chairman and the Vice Chair at two separate events both signaled that the central bank may be changing its tune. While policymakers started the year anticipating that they would commence the rate cutting cycle soon, hotter-than-expected inflation has shifted that calculus. In a prepared remark, Vice Chair Jefferson noted that interest rates could remain at their current restrictive level for longer if inflation persisted. Later, Fed Chair Powell echoed that sentiment. He noted that excluding a sudden economic slowdown, interest rates would need to stay restrictive for longer. The Fed Chair’s new tone is essentially one of dialing back expectations as markets had aggressively priced in numerous cuts this year. Investors on average are now expecting one and two cuts.

Chart 2 contains a line graph showing the average U.S. 30-year fixed mortgage rate. Rates have been declining since a recent peak in November 2023, but the most recent data show rates creeping back above 7% for the first time this year.

Higher rates are having a measurable effect on the housing market as data on existing home sales and housing starts and permits all declined in March. Both housing starts and building permits retrenched in March. In another release, existing home sales fell 4.3% m/m in March – the largest decline in over a year. While the measure managed to post a gain for the first quarter as a whole, relative to the subdued levels in 2023 Q4, the prospect of higher for longer interest rates are likely to see these gains pared back in the future. In fact, this week, the average rate on a 30-year fixed rate mortgage climbed above 7% for the first time this year and is likely to weigh on housing activity going forward (Chart 2).

Given recent readings on inflation and retail spending, and FOMC members comments acknowledging that rates will likely need to remain restrictive for longer, next week’s consumer spending and income data for March are highly anticipated. In particular, the Fed’s preferred inflation metric – the core PCE deflator – will be very closely watched to see how much of the recent hot CPI inflation carries over to PCE

Shernette McLeod, Economist | 416-415-0413