November 16, 2018
Market Commentary
Growth is Solid, Inflation is Benign, Why Worry?

It was another volatile week in financial markets as fears around slowing global growth were exacerbated by worries over Brexit. This, as the cabinet minister in charge of negotiating a Brexit deal with the European Union resigned over the direction of the proposed deal. The S&P 500 finished the week down 2.1% as of writing.

Financial market jitters are not a reflection of any newfound weakness in U.S. economic data, which continues to point to solid growth and limited inflation. This week, consumer price index (CPI) data for October showed headline inflation rise to 2.5%, mainly due to rising energy prices. Core inflation, on the other hand, edged down to 2.1% (from 2.2%). Over the past three months, core prices have risen an average of just 1.6% (annualized), suggesting little cause for alarm on the price front. What’s more, the recent pullback in the price of oil is likely to push headline inflation lower in the months ahead, with the Fed’s preferred metric – the personal consumption expenditure price index – likely to drift back below the 2% mark.

A relatively soft inflation environment is giving support to the more dovish voices on the FOMC. In comments made this week, Chair Powell struck a balanced tone, but gave a nod to some of these more dovish elements. In particular, he noted the conditions that could lead the Federal Reserve to slow its pace of rate hikes over the next year. Slowing global economic growth, fading fiscal stimulus, and the lagged impact of past rate hikes are three factors that the Fed is monitoring. Despite these risks, the Chairman also noted the relative strength in the American economy, and notably that with press conferences scheduled after every Fed announcement in 2019 (instead of just once a quarter), every meeting is “live” – that is, has the potential for a change in policy.

Other economic data confirmed the solid economic growth narrative. Retail sales rose a robust 0.8% in October, reversing a downwardly revised pullback in sales in September. The drop in September and rebound in October reflected hurricane-related disruptions. Overall, the retail sales data are consistent with real consumer spending advancing by around 2.5% in the fourth quarter. For all intents and purposes, this is a great number. Nonetheless, it does represent a deceleration from the heady 3.9% pace average over the second and third quarters of the year.

With real consumer spending likely to run in the mid-2% range, the overall economy is likely to follow suit. In this environment, the impact of tariffs is likely to be more noticeable. Already there are signs that businesses are attempting to get ahead of the scheduled increase in Chinese tariffs to 25% (from 10%) by stockpiling imports. This volatility makes reading the economic tea leaves and the job of the Fed in gauging the reaction of the economy to higher interest rates that much more difficult.

James Marple, Senior Economist | 416-944-6318

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision. All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC, which conducts insurance business in CA as CFGAN Insurance Agency. Albitz/Miloe & Associates, Inc., TD Economics, TD Bank Group, and Cetera Advisor Networks LLC are separate companies.
Albitz/Miloe & Associates, Inc. – 23133 Hawthorne Blvd. Ste. 305, Torrance, CA 90505