Market Note – September 11, 2023

By Hightower Great Lakes on September 11, 2023

5.6% Q3 Atlanta Fed GDP Now Model

One of biggest surprises in 2023 has been the resilience of the U.S. economy. The consumer has remained strong because the labor market is tight. They are spending on services, which is 70% of consumption.

Manufacturing remains under pressure but anything tied to aviation and onshoring has seen strong demand. As a result, the Atlanta Fed GDPNow model is registering a 5.6% read on 3Q GDP. This likely will come down (as it typically does throughout every quarter) but will likely remain elevated.

This stronger growth has led to persistent inflation and is the reason the Fed remains restrictive. We believe rates will stay higher for longer in order to get inflation back to the Fed’s 2% target. The Fed remains data-dependent, especially on readings on inflation and the labor market.

Inflation Back to Baseline or Bouncing Back?

August CPI will be reported this week and is expected to be +3.6% y/y, up from 3.3% y/y in July due to the fact that oil and other commodities have turned higher. In addition, there are several industries that are raising prices: insurance companies – including auto and property – are raising premiums and interest rates to manage higher repair costs, wages and increased climate risk.

Health insurers are passing down the cost from an increase in surgeries. Oil prices are reflecting disciplined output from producers, above $90 per barrel. Lastly, a rise in labor strikes and wage negotiations are pressuring companies to pass along those higher wage costs to consumers. UPS (UPS) announced it will raise prices +5.9% in 2024, on par with its FedEx (FDX) rival.

Strike While the Iron is Hot

Labor unions are continuing to keep up the pressure on employers, fighting for higher pay and more favorable working conditions. Airlines, shippers, automakers, writers and other industries are all being caught in the crossfire of labor union negotiations. Higher inflation and tight labor markets are driving unions to re-negotiate contracts with employers, and the unions seem to have the upper hand.

Yields Rising Consistently

Yield rises have been driven by economic acceleration. A continued strong labor market, unit labor cost, jobless/continuing claims all beating expectations have led to higher Treasury yields across the curve, with a steepening move as the 10-year led selloffs. 2- and 10-year inversion finished the week at -73 bps.

The probability of a rate hike during September’s FOMC meeting decreased from 12% last Thursday to 7% by Friday’s close. High yield spreads have continued to tighten, reaching near YTD lows of +412 bps at Friday’s close as credit markets continue to show signs of economic strength.

The Week Ahead

Earnings – Monday: ORDL; Tuesday-Friday: CRM Dreamforce Conference; Thursday: ADBE. Friday: LEN.

Economics – Wednesday: CPI (August); Thursday: PPI (August), Retail Sales (August); Friday: Industrial/Manufacturing Production (August), Michigan Sentiment (September).

Return for Selected Indices^[1]

Click here to read last week’s Market Note (8/29).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Bloomberg. As of September 10, 2023.