Solid Economic Data Gives Way To Interest Rate Concerns

Despite positive economic news, markets fret over future rate cuts last week. A strong consumer once again showed up in the data as 2nd quarter GDP was revised higher.

Originally, 2nd quarter GDP came in at +3.0%. Last month, the 1st revision showed that GDP was actually +3.3%. Last week, the 2nd revision bumped the number up to +3.8%, which would indicate a fairly robust economy. The primary contributor to the upward revision was consumer spending. In addition, the Atlanta Fed has revised their Q3 GDPNow projection up from +3.3% the previous week to +3.9%. Personal Income and Personal Spending showed a greater-than-expected move higher last week, as well.

The strong economic data last week caused some to question the Fed's Dot-plot that shows two more cuts in 2025. The futures have nearly doubled for the probability the

Fed won't cut at the October meeting. The PCE Price Index numbers released last week showed inflation at +0.3%, which was expected, but also flat year-over-year. This has calmed rate expectations for the time being. While Fed Chairman Powell acknowledged last week that job creation has dropped sharply, job losses have not materialized. Initial Claims fell to 6-week lows and Continuing Claims dropped to 9-week lows. And yet, Powell stated last week, "There is no risk-free policy path ahead." Well, such is life - everything involves at least some risk.

Also on the minds of investors last week was news about an impending shutdown of the U.S. government, as agreement on a fiscal spending package cannot be reached.

As it stands today, there is approximately a 60% probability of a government shutdown as the deadline is Tuesday at midnight. Congress and the White House cannot come to terms on how much or little to put in the fiscal stopgap to avoid a shutdown. It's important to remember that government shutdown have little long-lasting effects on the market. The last four shutdowns yielding positive equity returns within 30 days following the shutdown. However, the ride could be a little bumpy in the interim.

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