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Soft landing bets firm as inflation slows and consumer demand holds up

The Federal Reserve’s preferred inflation measure softened more than expected in November even as durable goods order soared, helping ratify bets on a “soft landing” in the US economy ahead of year end. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.1 percent in November from the prior month, bringing the three-month annualized pace to 2.16 percent, well within the central bank’s target range. On a year over year basis, core prices were up 3.2 percent, undershooting consensus estimates that had been set closer to 3.3 percent.

The overall personal consumption expenditures index was down -0.1 percent from the prior month, and up 2.6 percent from a year ago.

Personal income rose 0.4 percent month-over-month, accelerating from October’s 0.3-percent pace. Inflation-adjusted household spending climbed 0.3 percent after a downwardly-revised 0.1-percent rise in the prior month.

A separate report showed durable goods orders blowing past forecasts, with spending on ex-defence categories rebounding 6.5 percent after posting a -6.4 percent loss in October. Non-defence ex-aircraft capital goods orders surged 0.8 percent, suggesting that business investment remains shockingly healthy.

Front-end yields are climbing and the greenback is advancing as traders lower expectations for rate cuts from the Federal Reserve next year.

Personal Consumption Expenditures, %

The Canadian economy flatlined in October, but an advance estimate showed growth recovering slightly in November, helping ratify expectations for a slower pivot toward easing from the Bank of Canada next year. Numbers released by Statistics Canada this morning showed real gross domestic product remaining effectively unchanged in October, lower than the 0.2-percent preliminary estimate published previously. Statisticians observed that mineral extraction and retail sales were bright spots, but declines were widespread elsewhere, suggesting that underlying growth patterns are fading.

Our calculations suggest that on a per-capita basis, Canadian gross domestic product is roughly -0.9 percent smaller than in December 2018.

We think this sets the stage for a modest 0.5-percent expansion in the fourth quarter, but expect further weakness to emerge in coming months, even as falling long-term borrowing rates help relieve pressure on an over-leveraged private sector. The Canadian dollar should struggle to gain momentum relative to a declining greenback.

Change in gross domestic product from December 2018, %

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