Economic Commentary – September 2023

For adherents to the investment ideology of the “September Swoon”, September 2023 provided validation of this renowned market phenomenon. Defying a potent macroeconomic backdrop that continued to embody durable consumer spending, a resilient labor market, and expansionary economic growth, interest rates broadened their ascent throughout many segments of the economy, oil and gas prices soared as a result of unanticipated, voluntary, extended production and export cuts from Saudi Arabia and Russia, and domestic equity indices closed the month in negative territory (S&P 500: -4.87%, NASDAQ: -5.81%, DJIA: -3.50%).

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Affirming the rates market’s expectation of a less than a one percent probability of an interest rate increase, on September 20, at the conclusion of its sixth policy meeting of the year, the FOMC unanimously voted to undertake its second hawkish hiatus of its 19-month rate-hiking campaign, leaving the federal funds target rate range at   5.25% - 5.50%. While repetitive, and at times even somewhat monotonous, Fed officials have maintained their hawkish rhetoric and unyielding commitment to quashing inflationary pressures. Although recent inflation readings have evidenced disinflationary forces at work, the central bank has pledged to remain steadfast in its restrictive policy stance until it is convinced that inflation is on a discernable path to its desired 2% objective, while also concurrently admonishing the public and markets alike that we are now in a “higher for longer” interest rate regime.

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Nonetheless, while a hawkish pause was widely expected, the Fed’s release of its updated Summary of Economic Projections was the more anticipated, material source of information that was most coveted amongst market participants as it provided deeper insights into the Committee’s assumptions and forecasted trajectory for the remainder of 2023. Revised from June’s projections, the change in real GDP was boosted to 2.1% from 1.0%, the unemployment rate was lowered to 3.8% from 4.1%, PCE inflation was ticked up 0.1% to 3.3%, and Core PCE inflation was pared 0.2% to 3.7%. The terminal federal funds rate at 5.6% (indicating one more rate hike in 2023) was unchanged, but more interestingly, the 2024 federal funds rate was revised up to 5.1% from 4.6%. In essence, this is an indication that the FOMC expects to make two fewer rate cuts in 2024 than previously forecasted.

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Not to be overlooked, and quite frankly more imperative from a national governance standpoint, the U.S. federal government was facing a looming, seemingly inevitable government shutdown that would have taken effect at midnight on October 1. However, on the evening of September 30, Congress reached an eleventh hour, bipartisan compromise, passing a continuing resolution, stopgap funding bill (House votes: 335-91, Senate votes: 88-9) that was signed by President Biden, and kept the government funded through November 17.

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Succeeding July’s and August’s directional path, the U.S. Treasury yield curve continued to bear steepen, with interest rates rising across the yield curve at a larger magnitude on the longer end than the shorter end, as the market further absorbed the Fed’s higher-for-longer posture. The 2-year/10-year spread truncated its inversion to 47 basis points, and the 3-month/10-year pair curtailed its inversion to 88 basis points.

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U.S. Treasury Yield Curve Source: Bloomberg

 

September 2023 Macroeconomic Highlights

 

Inflation, Expectations, and Consumer Sentiment1:

CPI: 3.7% year-over-year (0.6% month-over-month); Core CPI: 4.3% year-over-year (0.3% month-over-month)

PCE: 3.5% year-over-year (0.4% month-over-month); Core PCE: 3.9% year-over-year (0.1% month-over-month)

PPI: 1.6% year-over-year (0.7% month-over-month); Core PPI: 2.2% year-over-year (0.2% month-over-month)

Core PPI less trade services: 3.0% year-over-year (0.3% month-over-month)

Inflation Expectations: 1-year horizon: 3.6%, 3-year horizon: 2.8%, and 5-year horizon: 3.0%

Consumer Sentiment: 68.1 vs. 69.5 in August; Current Conditions: 71.4 vs. 75.7 in August

Consumer Expectations: 66.0 vs. 65.5 in August

 

Labor Market2: The U.S. economy added 187,000 nonfarm payrolls in August, moderately eclipsing the 170,000 expected by economists surveyed by Bloomberg. Notable job gains occurred in health care (+71,000), leisure and hospitality (+40,000), social assistance (+26,000), and construction (+22,000).

• U-3 official unemployment rate: 3.8% vs. 3.5% expectation: +0.3% from July 2023.

• U-6 unemployment rate (marginalized, part-time workers for economic reasons): 7.1%.

• Labor force participation rate: 62.8% (+0.2%), Employment-to-population ratio: 60.4% (unchanged).

• Average hourly earnings for private nonfarm payrolls rose 8 cents to $33.82 (+0.2% month-over-month, +4.3% year-over-year).

• Employment revisions: July 2023 trimmed -30,000 to 157,000; June 2023 slashed -80,000 to 105,000.

 

Gross Domestic Product (GDP)3: According to the third and final estimate, real GDP increased at annual rate of 2.1% in the second quarter of 2023 vs. 2.2% in the first quarter of 2023.

• Second Quarter 2023: GDP Price Index: +2.0%; PCE Price Index: +2.5%; Core PCE Price Index +3.7%.

• Real disposable personal income: +3.3% vs. +8.5% in the first quarter of 2023.

• Personal savings rate as a percentage of disposable income: 4.5% vs. 4.3% in the first quarter of 2023.

• Average of Real GDP and Real GDI: +1.3% vs. +0.1% in the first quarter of 2023.

 

Housing Market4: Existing-home sales waned 0.7% (month-over-month) from July to a seasonally-adjusted annual rate of 4.04 million in August. Month-over-month sales in the West and South receded 2.6% and 1.1%, respectively, while sales in the Midwest advanced 1.0%, but remained unchanged in the Northeast.

• Year-over-year sales plunged 15.3%, down from 4.77 million in August 2022.

• Total housing inventory registered 1.10 million units, -0.9% from July, and -14.1% from one year ago (1.28 million units). Unsold inventory sits at 3.3-month supply at the current sales pace.

• The median existing-home price for all housing types was $407,100, +3.9% from August 2022, as prices rose in all four major U.S. regions.

• Average commitment rate for a 30-year, conventional, fixed-rate mortgage: 7.31%.

• New Home Sales: 675,000 (-8.7% month-over-month).

 

1Source: Federal Reserve Bank of New York – Survey on Consumer Expectations, and University of Michigan Consumer Sentiment Index

2Source: Bureau of Labor Statistics

3Source: Bureau of Economic Analysis (BEA)

4Source: National Association of Realtors (NAR)

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.  Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

 

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