PCE and GDP Data Show Softer Inflation, Economic Resilience

Soft landing incoming? Today’s slate painted an optimistic economic outlook, as Q3 GDP (5.2%) came in above expectations and Q3 PCE was revised lower to 2.3%. Rates dropped to their intraday lows after the data and closed 7-9bps lower across the curve. Evidence continues to mount that the Fed has made significant progress with inflation while maintaining economic strength. All eyes will be on tomorrow’s personal income, personal spending, and PCE data. Elsewhere, oil prices climbed today ahead of tomorrow’s OPEC+ meeting, where the group will try to resolve disputes over output quotas.

Famed investor Bill Ackman suggests the Fed may be forced to cut rates in Q1 of 2024. Ackman pointed to elevated real yields as a potential catalyst for a recession early next year. He also noted that a wave of upcoming debt maturities could lead to a “cliff-like effect” where companies could no longer benefit from low fixed funding costs. Ackman suggested that the Fed will cut rates sooner than currently priced in and offered Q1 as the likely timeline.

November Fed Beige Book shows slower economic growth and less labor demand. The November Beige Book reported slower economic activity and easing labor demand. Retail sales including auto remained mixed, but sales of discretionary items declined on average as consumer price sensitivity was elevated. Commercial real estate activity continued to slow overall, with persistent office segment weakness and softer multifamily activity. On labor, most districts reported only modest increases in employment, and the majority of districts reported that more applicants were available for open positions. Headcount reductions through layoffs or attrition were also reported by some districts.