Wednesday's Scoop: Nerves🌤️

Hey friend - it’s already Wednesday. Nice.

Here’s what you need to know today…

1. Americans spent way more in December than expected.

2. Home builders are ready to ramp up construction.

3. China’s economy is doing ok but faces different problems than the US.

S&P 500: 4,739.21
1Mo: 0% | 1Yr: +21% | 5Yr: +77%

The market wavered lower today as investors worried that a resilient economy might mean an extended period of inflation and high interest rates.

Americans did much more holiday shopping than expected. The Commerce Department reported retail sales rose 0.6% in December after rising 0.3% in November and falling in October. Consumers picked up spending across clothing and accessories. People opted for online spending even more. The 2023 sales increase of 5.6%, faster than the 3.4% inflation rate, shows that people are still spending more despite rising price tags.

Falling mortgage rates have home builders excited to ramp up construction. The National Association of Homebuilders confidence index spiked in January by the most in almost a year. Mortgage rates have fallen from their peak in October, spurring more demand for new homes. Fewer homebuilders had to offer discounts last month. Home supply is still a fraction of what it was pre-pandemic, raising demand for new construction.

The world’s second-largest economy has fully recovered from its post-lockdown lows. China reported 2023 annual Gross Domestic Product (GDP), retail sales, and industrial production data that aligned with its growth, spending, and manufacturing pace in 2019. Unlike America’s battle with rising living costs, China is battling deflation, with its broad measure of prices declining for a third straight quarter. Home prices fell the most since 2015 in December amidst a significant property and investment slump. China is also dealing with high youth unemployment and an accelerating population decline.

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What makes interest rates rise and fall?

Interest rates move freely, determined by supply and demand in the market, like the price of a home or a stock. That means Wall Street and big investors can influence whether interest rates rise or fall based on their projections about the state of the economy.

However, unlike other markets, policymakers have a lot of control to manipulate interest rates. The Federal Reserve, aka the central bank, can push higher or lower rates to regulate the economy. When the economy struggles, the Federal Reserve lowers interest rates to make borrowing cheaper, stimulating spending and other business activity. The Federal Reserve raises interest rates to restrict the economy when it risks overheating. Inflation is the heat gauge. So when living costs rise too quickly, the Federal Reserve raises interest rates and slows borrowing and spending.