We Are in the Soft Landing

1. Markets Realign after Trump Rally. Markets pulled back last week following the U.S. presidential election and the November Federal Open Market Committee (FOMC) meeting as investors focused on what the Trump Administration will look like for growth and inflation. The S&P 500 fell 2.08% in the week, although it remains up ~3% in the month of November. The decline was led by healthcare and technology, down 5.5% and 3.5% respectively. Financials, energy, and utilities led as the only positive sectors for the week.

Last week’s economic data came across as a consensus for a soft landing, an expanding economy, and a robust consumer. October’s consumer price index (CPI) came in line with expectations at 2.6% y/y, ahead of September’s reading of 2.4% y/y. The producer price index (PPI) came in slightly ahead of expectations at 2.4% y/y, ahead of September’s 1.9% y/y gain. Both Core CPI and Core PPI (excluding food and energy costs) came in with a 3% handle, 3.3% y/y for Core CPI and 3.5% y/y for Core PPI. Importantly, inflation is higher because economic growth is stronger than expected. 

October retail sales data showed that American consumers continue to be resilient. Retail sales grew 2.8% y/y in October and 0.4% m/m, both beating expectations. Sales at auto dealers rose 1.6% m/m, 2.3% m/m at electronic and appliance stores, and 0.7% m/m at restaurants and bars.^[1] More important was the revision made to September’s retail sales data; retail sales in the month were revised to 0.8% m/m, double the previous report of 0.4% m/m. In addition to retail sales, ISM Services have been in expansion for a number of months as consumer spending has remained in the services economy rather than the goods economy. Recall that the consumer is 75% of the U.S. GDP and services are 70% of consumption – so we pay very strong attention to these two economic data points.

This week markets receive retail earnings reports from Walmart (WMT), TJ Maxx (TJX), Target (TGT), and Lowe’s (LOW). More data and insight from these companies will provide a better understanding of the health of the consumer.

Chart 1: Over the Last Year, Retail Sales Has Been Steady As Inflation Declines^[2]

2. What is the Fixed Income Market Telling Us? Investors voiced a lot of confusion when the Fed’s September 50 basis point cut marked the bottom for the 10-year Treasury yield and 30-year fixed mortgage rates. In our view, this is because growth expectations have increased and as a result, inflation will remain stickier in the 2.5-3.5% range in the medium term. From an investment point of view – we much prefer higher growth and a little higher inflation versus the opposite because it means earnings can remain at the 8-10% level. Importantly, wages are growing above inflation, and this is part of the reason why consumers are doing so well and continue to spend.

Higher yields are a tail risk, but we think an exogenous event would need to take place for the ten-year Treasury yield to move above 5-5.5%. Mass deportations affecting the labor market, extreme tariffs putting upward pressure on inflation, or a return of 5-6% inflation are a few risks that could result in higher yields. But it is hard to fully project what 2025 and on will look like, as well as the timing behind Trump’s enactment of such policies. Going forward, growth is more important than inflation in determining the Fed’s path. In our view, a 2.9% terminal rate is not realistic, and as rate cut expectations fall, the Fed will likely revise their projected terminal rate higher. 

Chart 2: The Fed’s 50 Basis Point Cut on September 18 Served as the Recent Low for Both the Ten-Year Treasury Yield and Mortgage Rates^[3]

3. Fixed Income. U.S. Treasury yields whipsawed higher over the course of last week; the 2-, 10-, & 30-year yields rose by 5, 14, & 15 bps respectively, steepening the yield curve to +14 on the 2s10s spread. Investment grade and High yield spreads widened off the lows last week by 6 and 11 bps, respectively.

U.S. credit ratings deteriorated over the week as the main rating agencies issued 36 downgrades and 24 upgrades; financials had the most upgrades, while industrials had the most downgrades. Muni yields were lower across the week, falling 1-2 bps across the curve.

4. The Week Ahead.

Earnings – Tuesday: J, KEYS, LOW, MDT, WMT; Wednesday: NVDA, PANW, TGT, TJX; Thursday: CPRT, DE, INTU, ROST.

Economics – Monday: NAHB Housing Market Index; Tuesday: Building Permits, Housing Completions, Housing Starts; Thursday: Continuing Jobless Claims, Initial Claims; Friday: Markit PMI Manufacturing, Markit PMI Services, Michigan Sentiment. 

Stephanie Link’s TV Schedule:

Return for Selected Indices^[4]

Sources:

^[1] Source: AP. As of November 15, 2024.

^[2] Source: FactSet. As of November 15, 2024.

^[3] Source: FactSet. As of November 18, 2024.

^[4] Source: Bloomberg. As of November 18, 2024.

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