Chief Economist Scott Brown discusses the latest market data.
Earnings reports were mixed. Bond yields declined, as market participants generally expect the Fed to raise short-term interest rates earlier to get inflation under control.
Real GDP rose at a 2.0% annual rate in the advance estimate for 3Q21, reflecting weakness in motor vehicle production (semiconductor shortage) and the dampening effect of the delta variant. Consumer spending and business fixed investment slowed sharply following exceptionally strong growth in the first half of the year. Personal spending rose 0.6% in September and the early read on October retail sales was strong, pointing to a pickup in GDP growth in 4Q21. Durable goods orders fell 0.4% in September, reflecting a 27.9% decline in civilian aircraft orders. Ex-transportation, orders rose 0.4%. The U.S. merchandise trade deficit hit another record high in the advance estimate for September.
The Conference Board’s Consumer Confidence Survey showed improvement as easing concerns about the delta variant more than offset increased inflation worries. In contrast, the University of Michigan’s Consumer Sentiment survey indicated that higher inflation and falling confidence in government policies were greater concerns. The Employment Cost Index, the preferred measure of labor costs, rose 1.3% in the three months ending in September, up 3.7% year over year (vs. +2.4% one year ago).
Next week: The Federal Open Market Committee is widely expected to announce the gradual reduction (“tapering”) in asset purchases (most likely by $15 billion per month). Officials are unlikely to have begun discussing when to raise short-term interest rates, but investors will listen for clues in Chair Powell’s press conference (no revised dot plot at this meeting). ISM surveys (Monday and Wednesday) should remain strong (and still reflect supply chain issues). Friday’s employment figures for October should be consistent with tight labor conditions – nonfarm payrolls will remain subject to school year noise.