It was a busy week on the U.S. economic calendar, with the latest data pointing to solid economic momentum, but elevated inflation pressures. U.S. equities look to end the week in the red, as a hotter inflation report led to a significant AI-related selloff amid growing concerns that elevated interest rates could pose funding challenges and slow the AI buildout. Meanwhile, the 10-year Treasury yield retreated to just under 5.1% after briefly climbing above 5.3% earlier in the week. The pullback appeared to reflect a flight to safety rather than easing inflation concerns.

Retail spending held up in September, rising 0.8% on the month, following a 1.3% gain in August. While higher gasoline prices helped to boost the headline figure, gains were relatively broad-based with 8 of 13 retail segments recording higher sales on the month. Moreover, spending at bars and restaurants remained healthy, suggesting consumers remain willing to spend in discretionary areas. Elsewhere, initial jobless claims remained low and range-bound, while the Federal Reserve’s Beige Book reported little change in employment, pointing to continued labor market stability.

The inflation details were less reassuring. Headline CPI rose 0.6% m/m in September as higher energy prices pushed year-on-year inflation to 3.7%. Core inflation held at 0.3% m/m, disappointing expectations for some cooling, and accelerated to 2.6% year-on-year (Chart 1). Price pressures built across several categories, with firmer readings across core goods, shelter and non-housing services. The share of small businesses citing inflation as their most important problem picked up in September, while the Beige Book also pointed to some broadening in price pressures. Producer prices reinforced the message, surging 1.3% m/m and 6.3% year-on-year in September. These firmer inflation readings strengthened the case for additional tightening, though markets see December as the more likely timing for the next hike rather than October.

Higher rates are already weighing on interest-sensitive sectors, such as housing. Existing home sales ticked higher in September, but the improvement came off a downwardly revised August reading and activity remained subdued near the four-million mark (Chart 2). Inventory improved a little, with the months’ supply rising to 4.6. Still, the recent surge in mortgage rates will make September’s modest sales gain difficult to sustain. The average 30-year fixed mortgage rate has eased from 7.6% earlier this month, but remains above 7.3%. The roughly 130-basis-point increase from late-February levels of 6% adds about $300 to the monthly mortgage payment on a typical single-family home, weighing on affordability. 

Overall, this week’s data depict an economy that remains on a decent footing. However, with inflationary pressures elevated and demand remaining resilient, further policy action will be required from the Fed before year-end. Given the recent wave of Fed speak downplaying the urgency of delivering back-to-back hikes, it seems more likely that the FOMC will opt to skip October and hike again in December. 

Admir Kolaj, Economist | 416-944-6318