Financial News for the Week of October 27th, 2023

Longer-term Treasury yields continued to creep higher through the early portion of the week, as the looming threat of a mid-November government shutdown, increased Treasury issuance, and heightened geopolitical tensions remain key drivers pressuring the term-premia higher. After briefly surpassing 5% earlier this week, the 10-Year Treasury yield has since pared its gains and currently sits at a still elevated 4.85%. Meanwhile, equities edged lower for the second straight week – down 2% at the time of writing – but remain 8% higher on the year.

Turning to the economic data calendar, the Bureau of Economic Analysis (BEA) released its advance estimate of third quarter real GDP. The report showed economic activity accelerating at more than double the rate of expansion seen in Q2. The ongoing theme of economic resilience was on full display last quarter, with most major areas of spending recording gains in financial news. The strength in consumer spending was particularly eye-catching, jumping up 4.0% (Chart 1). The summer shopping spree was fueled by a resilient labor market and a further drawdown of the excess savings accumulated during the pandemic. Moreover, because many homeowners locked-in mortgages at ultra-low rates in 2020/21, the passthrough of higher interest rates to the consumer has been more muted relative to past tightening cycles.

Perhaps more concerning for policymakers is that spending momentum heated up at the end of the third quarter. September’s gain was the second strongest over the past eight months, and suggests consumers didn’t hold back last month, despite the looming headwind of student loan repayments restarting in October. At this point, we see Q3’s blowout numbers as the ‘last hurrah’ and expect a more tepid pace of consumer spending (1.5-2%) for Q4, before slipping sub-1% through the first half of next year.

Should the consumer prove more resilient, that will spell trouble on the inflation front. In fact, core PCE inflation data for September has already telegraphed some evidence of progress stalling. Price growth picked up to 0.3% m/m (up from the 0.17% m/m gains averaged over the three prior months), with notable strength in Powell’s ‘supercore’ measure, which has barely budged from last year’s highs (Chart 2).

From the Fed’s perspective, nothing out this week will influence next week’s interest rate decision. At this point, markets are fully priced for the FOMC to hold rates steady, and only attach a 20% probability to another rate hike in December. However, that could quickly change over the next week should the FOMC statement and/or Powell’s press conference strike a more hawkish tone. Next week’s Employment Cost Index release for the third quarter is also important given it contains a measure of wage inflation that the Fed watches closely. As well, October’s employment figures out Friday will be closely scrutinized as usual. Unless these reports show a definitive sign that the labor market is cooling, which looks unlikely given the recent strength in higher frequency indictors including jobless claims and Indeed job posting data, another rate hike come December seems inevitable.

 

Thomas Feltmate, Director | 416- 944-5730