Markets Rally Despite GDP Strength  

Rates continue to decline, 10-year closes below 4% for the first time in weeks. Swap rates and Treasury yields continued their fall today, as the 2-year yield dropped ~13 bps to 4.28%, while the 10-year dropped ~8 bps to 3.93%. The move continued the trend of the last few days, as investors are now eyeing a Fed policy shift in early 2023. Yields have normalized at a furious pace, the 10-year yield climbing as high as 4.25% a few days ago, while the 2-year was above 4.50% at the same time. Still, despite the normalization of rates, equities suffered significantly on the day, with S&P dropping ~0.61% and NASDAQ suffering losses of ~1.63%.

Economic growth in Q3 obscures important signs of economic slowdown. GDP grew 2.6% QoQ, exceeding analyst’s expectations of a 2.4% bump. While this is positive on face, the results may obscure components of GDP growth that provided clearer signals of an economic contraction. Residential investment contracted by 26.4%, impacted by higher rates, while consumer spending declined to 1.4% QoQ driven by pullbacks in spending on goods such as vehicles, food, gasoline and other energy goods. Some analysts believe that the Fed will likely view this slowdown in certain sectors as the desired result of policy tightening.

Day ahead. PCE price index data will be released at 8:30 AM ET. Personal income and spending for the month of September will also come out at 8:30 AM.