Cooling markets, strengthening yen, and hopes for a soft landing

Inflation holds still as hopes of a "soft landing" increase

Data released this week showed that the cost of living was unchanged during the month of October. The cost of gasoline dropped 5.30% last month, which was the greatest contributor to the flat CPI reading. Setting aside the volatile food and gasoline prices, core CPI rose by 0.20% from September in October, an increase that was still lower than economists expected. Core CPI rose 4.00% on an annual basis, a 0.10% reduction from September, a reading that also came in below expectations. Rising shelter prices are contributing to the steadiness of core CPI, which economists are saying still drive the bulk of inflation. The reduction in shelter price growth, from 0.60% to 0.30% in September, is due largely to the fall in hotel prices versus falling rents and homeowner costs. As inflation continues to cool, hopes for the long sought after “soft landing” are becoming more and more realistic. Goldman Sachs Research claims that the hard part of the inflation fight is over and that many of the problems facing the economy at the start of 2023 (recession fears, labor market overheating) now look largely solved.

Labor markets struggle slightly

Inflation remained more constant while the number of Americans who applied for unemployment benefits last week jumped to a three-month high. 231,000 applicants is a number indicative of some softening of the strong U.S. labor market. These claims still show a relatively low number of job losses and are proof of a stable economy but indicate that labor markets have cooled. The number of actual claims (claims before seasonal adjustments) topped 200,000 for the second week in a row. These had totaled less than 200,000 a month from late August through the end of October. Typically, unemployment claims topping 300,000 signal that a recession is near with jobless claims being one of the best barometers of an improving or worsening economy.

Industrial production has its ups and downs

Industrial production also fell in October, dropping by 0.60%. This was larger than the forecasted 0.40% drop economists from the Wall Street Journal predicted for the month. A significant portion of the decline was due to the 10.00% drop in output for motor vehicles and parts related to the United Auto Workers strike against the Big Three — Ford, GM, and Stellantis (formerly Chrysler) — domestic producers. Other sectors varied in their results. Utilities output fell 1.60% in October while mining output rose 0.40%, after staying flat in September. Defense orders rose for the tenth consecutive month, rising 1.70%. Capacity utilization fell, down to 78.90% from 79.50% in the month prior. With higher operating costs and a reduced demand for goods, manufacturing could struggle. However, the future is unclear, as shown by the variance in increasing and dropping industrial data.

Yen strengthens

Friday morning showed that the U.S. dollar was on track for a sharp fall against the other major currencies, one of its sharpest of the year. The cooler-than-expected inflation data helped to reset market expectations regarding the Fed’s timing around cutting rates, and the dollar responded with a 1.60% weekly drop, its largest since the middle of July. In contrast to the weakening dollar, the yen broke the 150 mark versus the dollar for the first time in almost two weeks, on track for its best week against the dollar in nearly four months. Economists suggest that the strengthening reflects global concerns around rising growth rates. Corporates with predominately U.S. dollar sales and expenses should be wary of the weakening dollar, especially as other economic indicators are cooling off. As markets begin to slow down, it may present concerns around economic prospects but are a strong indicator that central banks may be winning their battle with increased costs.

The U.S. avoids government shutdown

The U.S. government avoided a shutdown late Wednesday this week. The stopgap bill was approved and sent to President Biden to be signed into law. While a shutdown was averted this week, this decision tees up a contentious fight over funding in the new year. The bill extends until January 19, with priorities including military construction, transportation, housing, and the Energy Department.

Looking ahead

Moving into next week, it should be a lighter-than-usual volume of data releases, with the Thanksgiving holiday closing the markets on Thursday. Although a lighter week, consumers will still see existing home sales data, consumer sentiment, and flash U.S. services and manufacturing PMI.