The Fed’s “higher for longer” message, and higher longer-term interest rates last week, almost made us miss the good news around GDP growth and declining inflation.
- August Core Personal Consumption Expenditures inflation index reported last Friday was up only 0.1% in August and only 2.2% annualized rate over the past three months. Its 3.9% increase from a year ago is also an improvement from the prior month.
- Q2 real GDP growth’s third estimate last Thursday was 2.1% (annualized rate), and Q3 real consumption has likely accelerated to 3.5% annualized — up from 0.8% in Q2.
- 10-year U.S. Treasury rates have continued to rise, closing last week at 4.6%, which is up from 3.9% at the beginning of the year.
- Higher and rising Treasury borrowing requirements are raising Treasury interest rates even with inflation declining, economic growth slowing, and the Fed holding its rates steady.
The likelihood of a “soft landing,” i.e., no recession over the next 12 months, is declining because of the higher interest rates and weakening consumer spending.
- Robust consumer spending, which has been key to GDP growth, is slowing. Inflation-adjusted personal consumption expenditures were up only 0.1% in August after rising 0.3% and 0.6% in June and July, respectively.
- Americans outside the wealthiest 20% of the country “have run out of extra savings and now have less cash on hand than they did when the pandemic began.” (Axios/Federal Reserve)
- Oil prices are increasing from a June 11 low of $74 per barrel to over $95 per barrel and easily could top $100. OPEC + extended their production cuts until year-end, and U.S. disincentives for investing in oil, gas & refining mean these prices could continue to rise.
- Student loan repayments restarted yesterday, October 1, for 44 million borrowers. The average monthly payment is $393, reducing GDP by 0.1% in 2023 and by 0.3% in 2024. The biggest negative impact will be on retail spending.
- Mortgage rates nearing 7.5% are raising home ownership costs and damping homebuying and home building demand which have ripple effects through the economy.
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