Housing Starts Weaken in September

This morning, housing starts fell 0.5% in September, pulling the annual pace down from 1.36M to 1.35M, a two-month low. Starts were expected to decline 0.4%, according to the median forecast on Bloomberg. Single family starts rose 2.7%, while multi-family starts dropped 9.4%. Year-over-year, housing starts fell 0.7% in September, the largest annual decline in two months.

Building permits, meanwhile, dropped 2.9% in September, pulling the annual pace down from 1.47M to 1.43M, a two-month low. Building permits were expected to decrease 0.7% in September, according to Bloomberg. Single family permits rose 0.3%, while multi-family permits declined 8.9% in September. Year-over-year, building permits fell 5.7% in September, the eighth consecutive annual decline.

Yesterday, the European Central Bank (ECB) opted to cut its key interest rate another 25bps, taking the deposit facility rate from 3.50% to 3.25%. This marks the third round cut for a total of 75bps since June.  

The move was in line with expectations as the central bank aims to cushion the European economy amid receding inflation, dropping below 2% for the first time since 2021. Easing price pressures, however, have been accompanied by weaker growth with GDP slipping to 0.2% April to June, a two-quarter low. This is quite a dramatically different array of economic conditions than those facing the Federal Reserve still in the early stages of adjusting policy

According to statement, the decision was unanimous but offered no further guidance regarding future rate moves, repeating, “The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.” At the press conference following the statement release, ECB President Christine Lagarde, however, noted that economic activity has been “somewhat weaker than expected,” suggesting further support is likely needed in the near term. 

Back in the U.S., the latest read on the consumer showed retail sales rose 0.4% in September, a tenth of a percentage point more than expected and the strongest monthly gain since July. Year-over-year, however, retail sales increased 1.7% in September, the smallest annual gain since January.

Car sales were flat in September following a 0.4% decline the month prior, and gasoline stations sales dropped 1.6% in September following a 1.2% decline in August. Excluding autos, retail sales rose 0.5% at the end of Q3 and climbed 2.2% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.7% and increased 3.7% year-over-year.

Finally, excluding food, autos, building materials and gasoline station sales, control group sales – which feed directly into the GDP calculation – rose 0.7% in September, up from the 0.3% increase the month prior and more than double expectations, and gained 4.0% on an annual basis, the largest annual rise in three months.

In the details of the report, miscellaneous sales jumped 4.0%, clothing sales climbed 1.5%, and health and personal care sales rose 1.1% in September. Also, eating and drinking sales rose 1.0%, as did food and beverage sales, and general merchandise sales increased 0.5% due to a 0.4% gain in department store sales. Additionally, non-store retailer sales gained 0.4%, sporting goods sales increased 0.3%, and building materials sales ticked up 0.2% at the end of the third quarter. On the other hand, furniture sales fell 1.4%, and electronics sales dropped 3.3% in September, the second consecutive month of decline.

In addition, yesterday, initial jobless claims unexpectedly declined 19k from 260k to 241k in the week ending October 12, pulling the four-week average higher to 236k. The weekly decline to 241k is notably above a well-established range near 200k since the start of the year, suggesting one-off disruptions from the recent hurricanes are most likely at play. Meanwhile, continuing claims, or the total number of people claiming ongoing unemployment, rose from 1.86M to 1.87M in the week ending October 5.

Bottom Line: The latest read on retail spending highlights the ongoing strength and resilience of the U.S. consumer and by extension, the domestic economy. For the Fed, the growing positivity in the data from a robust employment report to hotter-than-expected spending to elevated core prices not only calls into question the September decision to cut 50bps, as arguments for impending weakness now appear unfounded, but also muddies the outlook for future policy adjustments. Going forward, any additional indications of underlying strength amid sticky inflation will lessen calls for a 25bp cut next month or even allow the Fed to bypass November altogether – meaning potentially no adjustment to policy just weeks from now, before turning to December, the final meeting of the year.

According to Bloomberg data, the market is currently anticipating 44bps in rate cuts by the end of the year, or slightly less than two additional 25bp reductions. The probability of a 25bp cut in November, meanwhile, is currently priced in at 89% with only an 11% probability of a hold.

The 10-year, meanwhile, continues to rise, pushing back over 4% for the first time since July. The 10-year is trading down 2bps, currently at 4.07% as of 9:35 a.m. ET.

Additionally yesterday, the Philly Fed Business Outlook Index jumped from 1.7 to 10.3 in October, a three-month high and surpassing the expected rise to 3.0. In the details of the report, new orders rose from -1.5 to +14.2 in October, the highest reading in two months, and shipments increased from -14.3 to +7.4 in October. On the other hand, prices paid declined from 34.0 to 29.7, a two-month low and averaging 24.8 over the past six months, and prices received decreased from 24.6 to 17.9 in October. Also, the number of employees declined from +10.7 to -2.2, a two-month low.

Also, industrial production declined 0.3% in September, a tenth of a percentage point more than expected and offsetting the 0.3% rise the month prior. Capacity utilization, meanwhile, fell from 77.8% to 77.5% in September, an eight-month low.

Business inventories, meanwhile, rose 0.3% in August, as expected and following a similar gain the month prior.

Finally, yesterday, the NAHB Housing Market Index rose two points to a reading of 43 in October, a four-month high.

Next week, the economic calendar begins on Monday with September Leading Index, followed by the Richmond Fed Manufacturing Index for October on Tuesday.

Later in the week, on Wednesday, weekly mortgage applications, along with September existing home sales.

On Thursday, weekly jobless claims, the September Chicago Fed National Activity Index, and the S&P global U.S. manufacturing, services, and composite PMIs will be released. Also on Thursday, September new home sales, and the Kansas City Fed Manufacturing Index reports will be released.

On Friday, durable goods orders, and the final University of Michigan Consumer Confidence Index for October will be released.

Finally, on the Fed-speak front, we will hear from a number of Fed officials before they enter their Fed-speak blackout period, including Dallas Fed President Lorie Logan, Kashkari from Minneapolis, Kansas City’s Schmid, Harker from Philly and Cleveland’s Hammack, among others.

-Lindsey Piegza, Ph.D., Chief Economist