Deal or No Deal

With just eight days left, legislators rejected House Speaker Kevin McCarthy's third attempt to avert a federal government shutdown, potentially the first of its kind since 2019. McCarthy’s proposal included steep spending cuts, restrictions on immigration and the resumption of construction on the U.S.-Mexico border wall. “This is a whole new concept of individuals who just want to burn the whole place down," McCarthy said after a group of Freedom Caucus Republicans voted with Democrats against his proposal.?

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To avoid a government shutdown, legislators must agree to pass nearly a dozen appropriations bills by month-end or agree to a short-term continuing resolution. Time, however, is rapidly running out and political analysts on both sides of the aisle are skeptical there is the political will from either side to “work together.”

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The latest standoff in Washington comes as the country’s debt level reached $33T, a record high, according to data from the Treasury Department. ?

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In the aftermath of the Fed’s rate announcement, or more specifically the more hawkish sentiment of higher for longer, Treasury rates continue to push higher with the 10-year rising over 4.50% for the first time since 2007. As of 10:22 a.m. ET, the 10-year is currently trading at 4.45%.?

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Perpetuating the notion of higher rates, Boston Fed President Susan Collins said interest rates will likely remain elevated as the battle against too-high inflation continues. Speaking at a Maine Bankers Association event this morning, Collins said, “I expect rates may have to stay higher, and for longer, than previous projections had suggested, and further tightening is certainly not off the table.”?

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Similarly, speaking at an Independent Community Bankers of Colorado event earlier today,?Governor Michelle Bowman?also voiced support for ongoing elevated rates in today’s inflationary environment. While she noted there has been progress, such progress, she said,?has not been sufficient in bringing inflation down to the Fed’s 2% target.?“I continue to expect that further rate hikes will likely be needed to return inflation to 2% in a timely way,” she said.?

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As the U.S. economy struggles to control inflation and navigate a soft landing, growth overseas, meanwhile, appears to have already stalled. The Eurozone Composite PMI rose from 46.7 to 47.1 in September, but marks the fourth consecutive month of contraction (a reading below 50), signaling the economy likely contracted in the?current quarter.

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Yesterday, on the economic calendar, initial jobless claims unexpectedly dropped by 20k from 221k to 201k in the week ending September 16, the lowest level since January, perpetuating the notion of a still tight labor market. Continuing claims, meanwhile, declined from 1.68M to 1.66M in the week ending September 9.

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Also yesterday, the Philly Fed Index plunged from +12.0 to -13.5 in September, a two-month low. According to the median forecast, the index was expected to decline to 1.0. In the details of the report, prices paid jumped from 20.8 to 25.7, employment inched up from -6.0 to -5.7, and inventories increased from -10.2 to +8.9. Also, the six-month outlook index gained from 3.9 to 11.1 in September, a two-month high. On the other hand, shipments declined from +5.7 to a reading of -3.2, delivery times dropped from -7.0 to -14.9, and new orders plunged from +16.0 to -10.2.

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Additionally, existing home sales unexpectedly fell 0.7% in August from 4.07m to a 4.04m unit pace in August, a seven-month low. According to the median estimate on Bloomberg, existing sales were expected to rise 0.7%. Year-over-year, existing home sales declined 15.3% in August, the 25th consecutive month of decline, albeit up from the 16.6% drop in July. Despite a fall in sales, the months’ supply of existing homes remained at 3.3 months, averaging 3.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 3.9% in August from a year earlier to $407k, up from the $406k median price reported in July.

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Finally, yesterday, the Leading Index declined 0.4% in August following a 0.3% decrease the month prior.

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This morning, the S&P Global U.S. Manufacturing PMI rose one point to 48.9 in September, more than the expected gain to 48.2, but still the fifth consecutive month below a reading of 50. The U.S. Services PMI, meanwhile, declined slightly from 50.5 to 50.2, but continues to remain in expansionary territory, with the Composite PMI dipping from 50.2 to 50.1 in September, a seven-month low.

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Next week the economic calendar begins on Monday with the August reading from the Chicago Fed, and the September reading from the Dallas Fed, followed by the Richmond Fed Index on Tuesday and the Kansas City Index on Thursday.

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In addition, on Tuesday, on the heels of disappointing supply-side housing data this week, the August new home sales report will be released and is expected to drop 2.0%.

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The key reports of the week, however, begin on Wednesday with a look at August durable goods. Last month, durable goods orders fell 5.2% in July, more than reversing the 4.4% headline rise in June. Year over year, durable goods remains in the black, albeit modestly, up 3.7%. Capital goods orders excluding aircraft and defense, a proxy for business investment, rose 0.1% and 0.8% year-over-year.

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On Thursday, GDP is expected to be revised up to a 2.3% gain in the final Q2 report after a downward revision from 2.4% to 2.1% in the second-round report.

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Finally, on Friday, August personal income and consumption and the all-important PCE reports will be released. As the Fed noted this week, there has been considerable progress in terms of taming inflation from earlier peak levels. However, inflation remains too high. Headline inflation is expected to rise from 3.3% to 3.6%, while the core, which excludes food and energy, expected to decline from 4.2% to 3.9%.

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-Lindsey Piegza, Ph.D., Chief Economist