|In the post-election economic environment, financial markets have expressed a sense of cautious optimism. Equity markets have reached all-time highs, largely on a belief that the new administration will bring needed tax and regulatory reforms and a significant infrastructure package. At the same time, markets are also sensing that additional federal spending might bring about greater debt. Hence, the slumping bond market has sent yields up notably over the past week, even before the Federal Reserve likely raises interest rates in December. To best illustrate this shift, Freddie Mac reported that the average interest rate on a 30-year fixed-rate mortgage jumped from 3.57 percent on November 10 to 3.94 percent on November 17, and it should exceed 4 percent this week for the first time this year.
Likewise, the U.S. dollar has continued to strengthen, up nearly 23 percent since June 2014 against major currencies, and the U.S. dollar index hitting a 13-year high on Friday. While stronger economic growth would be entirely welcome for manufacturers, an appreciating dollar will continue to be a headwind for exports. Fortunately, core consumer and producer inflation remains modest for now, even as we have seen pricing pressures pick up somewhat in recent months.
Turning to economic releases out last week, there was a lot to be thankful for. First of all, retail sales rose strongly, up 0.8 percent in October and extending the 1.0 percent gain seen in September. This suggests that Americans have opened their pocketbooks in a big way in the autumn months, and it serves as a stark contrast to the more-cautious approach to purchases seen earlier in the year. More importantly, the accelerated pace of spending is good news for retailers — and by extension, manufacturers — headed into the all-important holiday season. The year-over-year data help to put an explanation point on this. Retail spending has risen 4.3 percent over the past 12 months, a healthy rebound from the 1.7 percent pace observed in March. It was also the fastest year-over-year rate of growth since November 2014, or nearly two years.
The housing data were also quite encouraging. New housing starts jumped 25.5 percent in October to the fastest monthly pace since August 2007. New residential construction increased from an annualized 1,054,000 in September to 1,323,000 in October. To be fair, both of those figures are outliers to the year-to-date average of 1,169,100, with September’s surprising fall in activity followed by the strong rebound in October. In addition, housing permits edged up from 1,225,000 to 1,229,000. That was the highest level since November 2015 and the second time so far in 2016 that permits have exceeded 1.2 million units at the annual rate. Since permits serve as a proxy of future activity, this data is heartening, and this is echoed by data from homebuilders, who are very upbeat in their sales outlook moving forward.
Meanwhile, the Federal Reserve said that manufacturing production expanded modestly for the second straight month, up 0.2 percent in October. With that said, manufacturers continue to grow at a much slower pace than desired, as production in the sector was down 0.2 percent on a year-over-year basis. Along those lines, manufacturing capacity utilization inched up from 74.8 percent to 74.9 percent, but that remained well below the 75.6 percent utilization rate seen one year ago. Beyond the national data, manufacturing activity expanded in all three of the regional Federal Reserve Bank surveys out last week, including Kansas City, New York and Philadelphia. Sentiment eased in both Kansas City and Philadelphia but rebounded in the Empire State Manufacturing Survey after three straight months of declines. All of the regional releases found weaknesses in the labor market, but more positively, respondents remained optimistic about demand and output in the months ahead.
We will get further evidence of possible stabilization in the manufacturing sector this week with a number of economic reports. This includes flash surveys of manufacturing activity for the United States and Eurozone from Markit, and the Richmond Federal Reserve Bank’s latest report will provide a regional perspective. We will be looking for stronger durable goods orders and shipments data in the October release, hopefully rebounding from some softness in both August and September. We will also see reports with new figures for consumer confidence, existing and new home sales and the Chicago Federal Reserve’s National Activity Index.