GDP: GDP grew at a better-than-expected annualized rate of 3.5% in Q3, compared with 4.2% in Q2. While Q3 GDP growth was strong, its deceleration from Q2 reflected a downturn in exports and nonresidential fixed investment. Growth was driven by a strong 4% gain in consumer spending and an increase in government spending. Consumer spending comprises more than two-thirds of GDP. Economic growth remains on track for its strongest performance since the global financial crisis.
Fed Watch: Given strong employment growth this year, today’s announcement virtually ensures the Fed will maintain its current approach to monetary policy normalization. Nevertheless, a key measure of inflation—the PCE price index (personal consumption expenditure)—came in well below expectations (1.6% vs. 2.2% expected), so inflation worries likely are unfounded and likely won’t drive the Fed past current expectations. We expect another rate increase in December and maintain our forecast that the 10-year Treasury rate is much more likely to remain above 3% by year’s end, absent a black-swan event. The Fed has maintained its stance to reduce its nearly $4 trillion balance sheet. As of today, the 10-year Treasury stands at 3.1%. The 10-year breakeven inflation rate—a measure of markets’ expectation of inflation 10 years from now—is just below 2.1%.
Stock Market: A material increase in equity market volatility in the past six weeks culminated this morning with the stock market falling into full correction territory as it did in February. Mixed earnings reports by companies heavily impacted by raw material tariffs and slowing tech-sector growth are leading causes of the disruption. The Fed’s less accommodative stance and silence during this recent bout of volatility has further increased trader fears that they are on their own and can’t expect the Fed to immediately react when the market swoons.
Policy: Favorable fiscal policy at federal and state levels continues to support employment and wage growth. Wage growth could induce workers on the sidelines to re-enter the labor market, raising the labor force participation rate. On the other hand, productivity growth remains uneven and low by historical standards. As a result, it is likely that inflation will gently pick up.
