Rates Rise Ahead of Inflation Day

Economic data spurs a rise in rates. Stronger than expected private payrolls growth, homes sales, and a spike in consumer spending fueled a rise in swap rates today. The swap curve bear steepened, with the short end of the curve up ~8bps and the long end rising 1-5bps. Rates are now 50-70bps above their 2024 lows, reached in mid-September. Meanwhile, Brent and WTI crude oil rose ~2.5% today after Israel’s military chief said that Israel would “strike very, very hard” if Iran were to launch more missiles. Furthermore, data showed that US crude inventories declined by 515k barrels last week.

US GDP remains robust in Q3. Gross domestic product (GDP) rose 2.8% annually in Q3, according to initial estimates. GDP declined from 3.0% in Q2 and was below the 2.9% estimate, but economic output remains strong. Economic activity was largely buoyed by consumer spending, which grew 3.7% in Q2, the most in over a year and well above 2.8% in Q2. Increased government consumption (5%) contributed as well, with a large emphasis placed on defense spending.  

Fed’s preferred gauge of inflation expected to show mixed results. Core personal consumption expenditures (PCE) is expected to fall to 2.6% annually in September, which would be tied for the lowest rate of price growth since 2.2% in March 2021. However, monthly core PCE is expected to spike from 0.1% in August to 0.3% in September, which would be the highest rate of growth since April 2024. Today’s data showed 2.2% core PCE (quarterly), well below 2.8% in Q2 but above the 2.1% forecast. Ultimately, a mixed PCE slate would be unlikely to sway the Fed’s upcoming FOMC meeting, where markets expect another 25bps of rate cuts.