U.S. bond yields mixed, with the short end of the curve lower and long-end higher. Stock markets varied as the S&P 500 rose, with gold hitting record highs and Bitcoin gained nearly 2%. Crude oil prices fell.

U.S. bond yields exhibited mixed movements over the past week, with short-term yields registering a slight decline and long-term yields experiencing a modest increase. As a result, the yield curve continued to steepen. The 10-year Treasury yield rose to 3.754%, while the 2-year yield settled at 3.567%.

Stock markets also displayed mixed results. Small-cap stocks ended the week lower, while large-cap stocks made gains. Notably, the S&P 500 achieved new highs for the 42nd time this year, with the "Magnificent 7" stocks performing particularly well, increasing by nearly 2%. This upward momentum was fuelled by positive inflation and growth data.

The U.S. dollar remained steady against the euro at 0.8952. In the commodities market, WTI crude oil prices dropped by over 4%, largely due to concerns that China’s stimulus measures may be insufficient to revive its economy, along with fears of a potential recession in the U.S. and expectations of rising supply from Libya and the OPEC+ coalition. Meanwhile, gold prices reached new all-time highs, marking the third consecutive week of gains. In the cryptocurrency sector, Bitcoin increased by nearly 2%.

In Q2 2024, the U.S. economy grew by 3% with 2.2% inflation. Consumer spending rose 2.8%, and business investment surged 8.3%. New home sales hit 716k, while consumer sentiment increased by over 3%.

The U.S. economy grew robustly at 3%, with inflation at a low 2.5%. Consumer spending increased by 2.8%, and business investment surged by 8.3%, driven by a significant 9.8% rise in equipment investment. Revised data from the Bureau of Economic Analysis (BEA) revealed a stronger recovery from the COVID-19 recession, with annual GDP growth at 3% and Gross National Income growth at 3.5%. The personal savings rate was revised upward to 5.2%, indicating more disposable income than previously thought. In August, the PCE index rose by 0.1%, with a 12-month annualized rate of 2.2%, the lowest since February 2021. While the S&P Global PMI data showed a strong services sector, manufacturing faced contraction. New home sales reached 716k units, surpassing forecasts, and the median price fell by 4.6% YoY. Consumer sentiment rose over 3% from August, reflecting growing optimism despite concerns about inflation, which is projected at 2.7% for the next year, contributing to a resilient economic outlook amid disinflationary trends and anticipated interest rate cuts.

The economy grew 3% in Q2 2024, with inflation at 2.5%. Consumer spending rose 2.8%, business investment surged 8.3%, and revised data showed a stronger recovery from COVID-19.

The economy recorded a robust annualized growth rate of 3% in the second quarter of 2024. This positive trend, coupled with inflation data—though not the primary measure of inflation—provides a comprehensive overview of solid growth alongside decreasing inflation rates, now at 2.5%, down from 3.1%. Consumer spending, a critical component of economic activity, increased by 2.8% last quarter, slightly lower than the government’s earlier estimate of 2.9%. Business investment also remained strong, rising at an impressive annual rate of 8.3%, with equipment investment surging by 9.8%. Additionally, government spending exceeded initial expectations, further bolstering economic growth.

The BEA has also released annual revisions indicating that real GDP and Gross National Income (GNI) growth stood at 3.0% and 3.5%, respectively, over the past year. These revisions reflect a stronger recovery from the recession induced by COVID-19, with upward adjustments to personal income growth rates. Notably, real disposable personal income has been growing more rapidly since 2021, suggesting that the historically low savings rate observed last quarter was significantly underestimated (currently at 5.2%, compared to the previous estimate of 3.3%). Furthermore, the gap between GDP and GNI has narrowed, with a notable upward revision of 3.8%, indicating a more optimistic economic outlook. These updates highlight the economy's resilience amid disinflationary pressures, supporting President Biden's economic narrative.

We are witnessing a scenario characterized by robust economic growth alongside low inflation and a low unemployment rate. In this context, the Fed will primarily rely on employment data to guide its monetary policy decisions. We anticipate two additional interest rate cuts before the end of the year.

In August, the PCE index rose 0.1%, with a 12-month annualized rate of 2.2%. Labour market developments and inflation indicators suggest potential constraints on consumer spending and future monetary policy adjustments.

The PCE index increased by 0.1% MoM, following a 0.2% rise in July, in line with market expectations. The 12-month annualized rate has declined to 2.2%, the lowest level since February 2021, while the 6- and 3-month annualized rates are now 1.9% and 1.5%, respectively. Prices for services rose by 0.2%, contrasting with a 0.2% decrease in goods prices. The core PCE deflator, a key inflation indicator monitored by the Fed, also recorded a monthly increase of 0.1%, maintaining an annualized rate of 2.7% and indicating progress toward the 2% inflation target. While income growth data have been revised upward to reflect a savings rate of 4.8% in August, real household disposable income has shown only minimal monthly increases of 0.1% for three consecutive months, suggesting potential constraints on consumer spending. Notably, the personal savings rate for July was significantly revised to 4.9%, up from 2.9%, alleviating concerns regarding low savings levels. With the unemployment rate projected to rise to 4.3% next month, developments in the labour market will be crucial in shaping future monetary policy as inflation remains subdued.

The Fed is increasingly reliant on labour market data as the economy continues to grow at a healthy pace and inflation is trending toward the 2% target; therefore, we anticipate two additional rate cuts this year, totalling a 50 bp reduction.

The S&P Global PMI data indicates a robust service sector, but declining manufacturing, rising costs, and political uncertainty may impact business confidence and economic outlook.

The composite PMI index fell to 54.4 in the preliminary September estimate, slightly above the consensus of 54.3 but down from August's 54.6. This reflects ongoing expansion in the services sector, while manufacturing output experienced its second consecutive month of modest contraction. The manufacturing PMI decreased to 47 in September, down from 47.9 in August, indicating the steepest contraction in US manufacturing activity in over a year. Conversely, the services PMI edged down to 55.4 from 55.7, surpassing the forecast of 55.3. Despite these changes, early indicators suggest a robust economy, with an anticipated annualized GDP growth rate of 2.2% for the third quarter. However, concerns arise from the dependence on the services sector for growth, given the decline in manufacturing and waning business confidence amid rising political uncertainty leading up to the presidential election, which is impacting demand, hiring, and investment. Furthermore, the survey points to increasing price pressures, with input costs in the services sector rising at the fastest pace in a year, indicating that the FOMC may need to proceed cautiously with further rate cuts despite signs of a weakening hiring trend.

We foresee that, similar to Europe, the manufacturing sector will serve as a drag on economic growth in 2024.

U.S. new home sales reached 716k, exceeding forecasts. Builder confidence rises, supported by lower mortgage rates, despite challenges in labour and land availability. Median prices fell 4.6%.

New home sales in the U.S. reached 716k units, surpassing the forecast of 699k, with July figures also revised upward. Despite a monthly decline, sales increased nearly 10% YoY and are 19% above the pre-pandemic five-year average. The new housing sector has demonstrated resilience amid challenges in the existing housing market, bolstered by builder incentives that encourage buyer participation. Positive indicators include a rise in builder confidence reported by the National Association of Home Builders (NAHB) in September, aligning with a reduction in mortgage rates of over half a percentage point since early August. Additionally, builders express optimism about future sales for the first time since May 2024, supported by the ongoing housing shortage, lower mortgage rates, and their capacity to offer incentives. However, challenges persist regarding labour, land availability, legal issues, lumber costs, and lending practices. Notably, the median sales price fell by 4.6% YoY to $420,600, although it remains higher than the price of existing homes.

We expect that a recovery in the housing market may not occur until 2025. Mortgage rates remain elevated, though they are projected to decline gradually with anticipated Fed rate cuts.

Consumer sentiment rose over 3% from August, with optimism increasing across demographics, despite ongoing concerns about high prices and inflation, now at 2.5%.

Consumer sentiment has continued its upward trend, increasing by over 3% compared to August, with this rise observed across all educational levels and political affiliations. All five components of the sentiment index recorded gains, notably driven by a 6% increase in one-year business expectations. Currently, the expectations index stands 13% higher than a year ago, indicating a heightened sense of optimism among a broad segment of the population.

Despite sentiment remaining below historical averages due to ongoing frustrations over elevated prices, consumers are increasingly recognizing that inflation is slowing. This uptick in sentiment points to a more promising economic outlook. Concurrently, many consumers report that their expectations are influenced by the outcomes of the upcoming election. Compared to August, there is a growing expectation among consumers from all political backgrounds for a potential Harris presidency; however, approximately two-thirds of Republicans still anticipate a Trump victory.

High costs continue to be a significant concern impacting personal finances, even as inflation has improved since its peak in 2022. Currently, inflation is at 2.5%, marking the lowest rate since February 2021. One-year inflation expectations are projected at 2.7%, while five-year expectations stand at 3.1%.

We project a modest enhancement in consumer confidence in the latter half of the year, bolstered by anticipated interest rate reductions from the Federal Reserve and declining inflation rates.