Economic Acceleration? – Halyard’s Weekly Wrap – 7/28/23
The highlight of the trading week was not Wednesday’s FOMC rate decision, but the slew of economic data released on Thursday. The data was unambiguously strong, and more in line with an accelerating economy than one that is slowing. Gross domestic product (GDP) was expected to slow to 1.8% annualized from the 2.0% recorded in the first quarter. Instead, it grew 2.4%, driven higher by continued resilient consumer spending and strong business spending. The price index component of the report grew at an annualized rate of 2.2%, down from 4.1% recorded in the prior quarter.
Released simultaneously with GDP were the durable goods and the weekly unemployment reports. Durable goods came in much higher than expected, gaining 4.7% for the month, skewed by a big jump in aircraft deliveries. However, excluding aircraft, durable goods sales grew by a respectable 0.6%. Initial claims and continuing claims for unemployment insurance both fell by more than expected, with the former totaling the lowest level since February of this year.
The data release was not all good, though. Pending home sales were down 14.8% year-over-year, but with mortgage rates at unaffordable levels, that outcome was not a surprise.
The results of the FOMC meeting were as expected. The committee raised the overnight interest rate corridor 25 basis points to 5.25% to 5.50%. In the Chairman’s post-meeting press conference Powell refused to clarify whether he expected to raise the rate again in September, despite being asked the question repeatedly, and from many different angles. From our perspective, if the surprisingly strong data released on Thursday continues through the summer, a September rate hike is a lock.
The unexpectedly favorable news had an outsized effect on the markets. The 30-year bond traded 2-points lower on Thursday and is closing out the week at 4.03%, about one basis point below the high yield for 2023. Similarly, the S&P 500 set a new 2023 high on Thursday and is closing the week slightly below that high.
Looking forward to next week, we’ll be watching to see if the drop in unemployment claims is foretelling an acceleration in the jobs gained in July. On Tuesday, the oft ignored Job Opening and Layoff Turnover (JOLTS) report will give us a look at the number of unfilled jobs in the economy. On Friday we’ll be watching the employment report to determine if the slowing last month continued into July or if the unemployment insurance dip is confirmed by accelerated hiring.