Fed calls for continued tightening

Author: Portfolio Specialist Group

May 28, 2018

AGF Weekly Perspectives

“A recap of last week’s top economic news and what’s to come”

Fed calls for continued tightening

  • Minutes from the U.S. Federal Reserve’s (Fed) meeting in May reinforced expectations for continued policy tightening. Risks appear balanced despite significant discussion around trade concerns, noting the potential impact on domestic business spending and retaliation from China.
  • Higher inflation has not concerned the Fed, noting an overshoot past target is “consistent with the Committee’s symmetric inflation objective”. And despite a strengthening labour market, wage pressures have moderated in recent months.
  • Overall, the Fed hinted additional tightening will “likely soon be appropriate”, with a June rate hike fully priced in to market expectations.

U.S. home sales slip

  • U.S. existing home sales fell 2.5% in April in part due to rising prices and limited supply, and are down 1.4% from a year ago. A 1.6% rise in condo sales was more than offset by a 3.0% decline in single-family homes.
  • The number of sales listings fell 6.3% annualized, with homes remaining on the market only 26 days on average in April, down from 30 days in the prior month.
  • New home sales also slipped in April, falling 1.5%, though are 8.4% higher year-to-date as compared to 2017.

U.K. inflation slows

  • U.K. inflation rose 0.4% in April, bringing the annualized pace down to 2.4%. Despite holding above target, the 13-month low eases pressure off of the Bank of England, who have wavered in intentions to raise policy rates.
  • Core inflation also missed expectations at 2.1% annualized in April.
  • Also reported, U.K. retail sales rebounded in April with a 1.6% gain after cold weather impacted activity in the prior month. Higher spending on fuel led the upswing in April.

Other economic news

  • U.S. durable goods orders fell 1.7% in April, caused by a 29% decline in nondefense aircraft and parts (granted the volatile category surged 60.7% in March). Outside of transportation, core orders rose 1.0% in the month.
  • The Eurozone Manufacturing PMI fell to a 15-month low of 55.5 in May, though numerous public holidays during the month may have hampered activity. Meanwhile, the U.S. Manufacturing PMI reached the highest level since September 2014 at 56.6 in May.

What’s to come

Canadian GDP and U.S. employment

  • Canadian GDP will be reported for the first quarter on Thursday, following the Bank of Canada’s meeting earlier in the week. The eurozone is set to release employment and inflation data on Thursday, while U.S. nonfarm payrolls and unemployment rate will be reported Friday.

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