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Wow – what a week! Not only did temperatures cool off dramatically around the country, but the financial market outlook also cooled – and not in a good way. With a week to digest the Federal Reserve’s “higher for longer” strategy, the financial markets concluded that the central bank is very serious about keeping rates high until inflation reaches 2%. The markets also realized there are too many variables that are working against (or maybe in tandem with) the Fed that could prolong the higher interest rate environment and cause serious economic problems. Topping the list of stresses for the bond market are a possible downgrade of U.S. debt if the government shuts down on October 1, as well as the ever-growing amount of Treasury notes and bonds with fewer buyers. The supply of Treasuries has exploded from $5 trillion pre-financial crisis to $25 trillion today, while the Fed, U.S. banks and foreign investors have all stepped back from buying Treasury securities. More supply with less demand equals lower prices and higher yields.
The stock market is becoming increasingly concerned about the ongoing UAW strike, the consumer pulling back spending and the economy weakening, which in turn hurts company profits. Not to mention investors leaning more toward the safety of a risk-free 5% in bonds over the whims of a volatile stock market. Last, but not least, there is still the threat that inflation doesn’t continue to fall but stays sticky and high. The price of oil traded at $95 a barrel this week, the highest level in over a year.
Key Indicators this Week
Spending/Income/PCE – The Fed’s most important inflation barometer, core PCE Y/Y, measured 3.9% in August. This is the first time the reading has fallen below 4% since June 2021. The headline index was 3.5%, a slight increase over July’s reading of 3.4%, likely due to higher energy prices. Personal spending, which includes spending on goods and services, was up 0.4%, less than half the pace of July. This is just another sign that consumers may be pulling back on discretionary spending. Incomes rose 0.4%, double the pace from July. The savings rate fell to 3.9%, the lowest level in eight months.
Housing – The rise in mortgage rates in August to above 7% had an immediate impact on the housing market. Both new and pending home sales, which are measured when contracts are signed, plummeted the most since September 2022. New home sales fell 8.7% and pending home sales declined 7.1%. The number of contracts signed to purchase an existing home was the lowest since April 2020, due not only to a lack of affordability, but a lack of supply as well. The inventory of homes for sale was the smallest August inventory in 24 years. September is not stacking up to be any brighter for buyers or sellers. The surge in Treasury yields this month pushed the average 30-year mortgage rate to 7.83%, the highest in 23 years.
GDP – The pace of growth in the second quarter held steady at 2.1% after the third calculation. However, consumption was cut in half from 1.7% to 0.8%, the lowest level since the beginning of the pandemic. This flies in the face of the ongoing premise that strong consumer spending has been the primary force behind the strong economy. Stronger business investment offset the slowdown in consumer spending. The latest Atlanta FedNow GDP estimate for third quarter growth is 4.9%, down from 5.8% a month ago.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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