Weekly Market Update: U.S. Economic Strength in Q3 Defies Slowdown Expectations  

What We’re Watching this Week:

  • ADP payroll employment report will be released on Wednesday.
  • U.S. job openings report reflecting labor strength’s potential influence on the Fed.
  • The latest Fed meeting and rate decision announcement will take place on Wednesday.
  • U.S. non-farm payrolls are expected to fall.

Highlights from Last Week:

  • Major North American stock indices saw a second consecutive week of declines.
  • The U.S. economy experienced growth in the third quarter, with GDP surging at an annual rate of 4.9%.
  • U.S. pending home sales increased slightly in September but remained near record lows due to high mortgage rates and low inventory.
  • Inflation in the U.S. rose, with the PCE price index increasing by 0.4%, leading to a decline in consumer sentiment.

The major North American stock indices experienced a second consecutive week of declines due to mixed corporate earnings, concerns about rising interest rates and geopolitical risks. In reaction, the 10-year U.S. Treasury note briefly exceeded 5% for the first time in 16 years. Tech giants such as Amazon, Google’s parent Alphabet, Facebook’s Meta Platforms and Microsoft, which are all part of the influential Magnificent Seven tech group, reported earnings that showed general growth but were met with market scrutiny over increasing expenses. Amazon’s report, released after markets closed on Thursday, received a relatively positive response, leading to a rally in its shares. Investors had been looking to these tech giants for strong results to counter worries about interest rates and geopolitical risks. The pan-European STOXX Europe 600 Index declined by 0.96% in local currency terms due to uncertainties surrounding interest rates, the economy and conflicts in the Middle East. Major European stock indices also declined: Germany’s DAX dropped by 0.75%, France’s CAC 40 Index eased by 0.31%, Italy’s FTSE MIB dipped by 0.25% and the U.K.’s FTSE 100 Index lost 1.50%.

On Tuesday, S&P surveys indicated improved economic conditions in the U.S. at the beginning of the fourth quarter. The flash U.S. services sector index reached a three-month high of 50.9, while the U.S. manufacturing sector index climbed to a six-month high of 50. These indices gauge economic health, with scores above 50 signifying expansions. Slower inflation and hopes of stabilizing interest rates have contributed to this positive trend. Notably, manufacturers reported increased demand for their products for the first time since April. Material costs rose at their slowest pace in three years, suggesting a decline in inflation. Businesses expressed readiness to pass on cost savings to customers to stimulate sales. Most survey respondents exhibited optimism about the next 12 months and continued hiring, albeit at a slightly reduced rate. This growth defies expectations of economic slowdown due to rising interest rates meant to curb inflation. Although economists anticipate potential impacts from higher borrowing costs, strong employment and continued hiring should support consumer spending, potentially preventing a recession in the U.S..1

In the third quarter of the year, the U.S. economy experienced robust growth, with GDP surging at an annual rate of 4.9%, defying expectations of a slowdown. This growth was more than double the rate observed in the first half of the year and marked the most significant increase since 2014, excluding the pandemic years of 2020-2021. Wall Street had anticipated a 4.7% increase in GDP. Consumer spending, a major driver of the U.S. economy, increased by 4%, supported by higher government spending and a rebound in inventories. Despite expectations of a slowdown due to rising interest rates, many economists still anticipate a decline in growth as interest rates are expected to remain high. Inflation also rose to 2.9% annually in the third quarter. While the strong growth is a positive sign, there are concerns about its sustainability, especially given the impact of rising borrowing costs on housing and the potential economic slowdown in the future.3

Also on Thursday, the U.S. Labor Department reported that in the week ending on October 21, initial jobless claims in the U.S. increased by 10,000 to a total of 210,000, slightly exceeding the expectations of economists who had forecasted a rise of 9,000 to 207,000. The previous week saw a revised decrease of 11,000 to 200,000, initially estimated as a drop of 13,000 to 198,000. Notably, these claims have now returned to a range last observed in January, after drifting higher earlier this year. Concurrently, the number of individuals already receiving jobless benefits in the week ending on October 14 rose by 63,000 to reach 1.79 million, marking the fifth consecutive increase and the highest since May. This may indicate that some workers face challenges quickly finding new employment opportunities. While low initial jobless claims suggest a robust labor market and the potential for continued economic growth, the increase in ongoing claims could signify a slowdown in hiring, leading to a need for the Federal Reserve to raise interest rates further. Economists are keeping a close eye on continued claims as a potential signal of a softening in labor demand and the persistence of workers on government support due to difficulties in securing new jobs promptly.4

In September, orders for durable goods in the U.S. increased by 4.7%, primarily due to a surge in new contracts for Boeing airplanes. This growth exceeded economists’ expectations, who had predicted a 2% increase. However, when excluding orders for aircraft and cars, new orders showed a more modest increase of 0.5%, aligning with forecasts. It’s typical for the transportation sector to significantly impact the fluctuations in the durable goods report. On a positive note, overall business investment saw strong growth for the second consecutive month, with “core orders,” which exclude defense and transportation, rising by 0.6%. Companies had reduced their investment in the past year due to higher borrowing costs and economic uncertainty.5

U.S. pending home sales increased by 1.1% in September, but they are still near record lows due to high mortgage rates and low inventory, according to the National Association of Realtors (NAR). On an annual basis, pending home sales were down 11%, marking the second-lowest reading since 2001. This performance exceeded expectations on Wall Street, where economists anticipated a 1.5% decline in September.

The NAR also forecasts a 17.5% decrease in existing home sales in 2023, with a slight 0.1% increase in median home prices to $386,700 due to low inventory. However, the NAR anticipates a rebound in home sales in 2024, with a 13.5% increase, and a 0.7% rise in home prices to $389,500. They also expect the 30-year mortgage rate to decrease to 6.9% in 2023 and 6.3% in 2024. The U.S. housing market faces challenges from both demand and supply issues, but the NAR is confident in its recovery prospects, especially if home builders create more inventory.6

On Friday, the government released that the U.S. experienced a notable economic landscape marked by rising inflation and robust consumer spending in September. Inflation, measured by the PCE price index, increased by 0.4%, exceeding expectations and maintaining a 3.4% annual rise, significantly above the Federal Reserve’s 2% target. The core PCE rate of inflation, excluding volatile food and energy costs, rose by 0.3%, meeting economist predictions. However, the annual core inflation rate slightly decreased to 3.7%, which investors favorably received.

On the consumer spending front, September saw a 0.7% increase, surpassing expectations and contributing to a robust 4% growth in the third quarter, driven by spending on services, healthcare, and housing. Americans also invested more in cars, prescription drugs, and gasoline. When adjusted for inflation, the spending increase was more modest at 0.4%. Simultaneously, U.S. incomes grew by 0.3% in September, yet after accounting for inflation, they declined for the third consecutive month. The savings rate decreased to 3.4% from 4%, a consistent trend since the pandemic’s end, indicating households have a reduced financial safety net.

While rising inflation has pressured the Federal Reserve to consider interest rate hikes, the Fed will unlikely take such actions at the upcoming meeting. The U.S. economy showed strength in the third quarter, fueled by consumer spending, with no imminent signs of a significant spending slowdown, given the low unemployment rate. As long as consumer spending remains strong, the economy is expected to avoid a recession despite inflationary concerns.7

Also on Friday, the University of Michigan reported that consumer sentiment declined by approximately 6% in October, mainly due to higher-income individuals and those with significant stock holdings, reflecting the recent weakness in the stock market. Expectations for one-year business conditions fell by 16%, and expectations for personal finances in the coming year dropped by 8%, driven by concerns about inflation and global uncertainties. Year-ahead inflation expectations increased from 3.2% to 4.2%, the highest level since May 2023, while long-run inflation expectations moved from 2.8% to 3.0%. These long-run expectations have remained elevated compared to pre-pandemic levels. 8

Sources:

1 https://www.pmi.spglobal.com/Public/Home/PressRelease/800861276eb949fc9646061f8eb2ffb4

https://www.census.gov/construction/nrs/current/index.html

3 https://www.bea.gov/news/2023/gross-domestic-product-third-quarter-2023-advance-estimate

4 https://www.dol.gov/ui/data.pdf

5 https://www.census.gov/manufacturing/m3/adv/current/index.html

6 https://www.nar.realtor/newsroom/pending-home-sales-grew-1-1-in-september

7 https://www.bea.gov/news/2023/personal-income-and-outlays-march-2023

8 http://www.sca.isr.umich.edu/

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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