Unadorned Notes: October 21-23, 2024
U.S. Economy Outpaces Global Peers; Home Renovation Spending Poised Rebound; U.S. Home Sales Reach 14-Year Low; Treasury Yields Surge Amid Risks; Gold Rally Expected Through 2025
Economics, Finance, and Business Updates
U.S. Economy Outpaces Global Peers: The International Monetary Fund (IMF) forecasts U.S. GDP growth of 2.5% for the fourth quarter of 2024, the fastest among G7 nations. This growth is driven by higher nonresidential investment, increased consumer spending, and productivity gains, supported by green energy and infrastructure initiatives. U.S. gross fixed capital formation is projected to rise 4.5% in 2024, significantly outpacing other advanced economies. By contrast, Europe’s economy continues to struggle, with Germany’s investment spending expected to decline. U.S. energy independence and productivity gains are key factors behind the economic divergence between the U.S. and Europe.1
Fed Officials Support Further Cuts: Four Federal Reserve policymakers expressed support for further interest-rate cuts but disagreed on the pace. Three officials advocated for a gradual approach, citing economic uncertainty, while San Francisco Fed President Mary Daly argued for continued reductions, given the tightness of current policy. Daly emphasized that ongoing rate cuts should proceed as long as inflation trends toward the 2% target. Kansas City and Dallas Fed presidents also favored a cautious strategy to avoid market volatility. Minneapolis Fed President Neel Kashkari noted that sharp labor market deterioration could justify faster rate cuts.2
Home Renovation Spending Poised Rebound: Home renovation spending is expected to recover in 2024 as lower interest rates make it easier for homeowners to access equity. After a pandemic-fueled surge, remodeling activity declined due to high borrowing costs, impacting building-product businesses. Harvard University predicts spending will reach $477 billion annually by next summer, nearing pre-slowdown levels. Americans hold over $35 trillion in home equity, with many awaiting rate cuts to fund large projects. Cash-out refinancings rose 50% in September 2024, signaling renewed interest in home improvements.3
U.S. Home Sales Reach 14-Year Low: U.S. existing home sales fell 1.0% in September 2024 to an annual rate of 3.84 million units, the lowest since 2010, driven by high mortgage rates and prices. The housing market continues to struggle, with entry-level homes remaining scarce despite improved supply. The median home price rose 3.0% year-on-year to $404,500, the highest for any September. Hurricane damage in Florida contributed to regional declines in the South, while the West saw an increase in sales. Economists predict subdued housing activity until 2025, with interest rates being a key factor.4
Treasury Yields Surge Amid Risks: The term premium on 10-year U.S. Treasury notes has reached its highest level since November 2023. This surge reflects investors’ demand for higher compensation due to growing uncertainty over inflation, government spending, and potential tariff policies. Treasury yields have increased significantly, with the 10-year note approaching 4.25% and bond market losses extending further. Concerns over U.S. debt levels and fiscal deficits are intensifying ahead of the upcoming election.5
Dollar Demand Surges Before Election: Demand for the U.S. dollar has surged ahead of the U.S. election, with investors hedging against China-linked currencies like the Singapore and Australian dollars. JPMorgan strategists noted that dollar positioning has shifted from short to neutral, leaving room for further long positions. Speculators have also reduced their net dollar short positions accumulated earlier this year. Options market activity shows a rise in bullish calls on the dollar, with euro put options targeting parity with the dollar. The potential for expanded U.S. tariffs under a new Donald Trump presidency could further pressure the euro.6
Gold Rally Expected Through 2025: Major banks predict gold’s price surge will extend into 2025, driven by rising demand from central banks and exchange-traded funds (ETFs), alongside expectations of further global interest rate cuts. Goldman Sachs forecasts prices could reach $2,900 per ounce by early 2025, with a potential spike towards $3,000. Non-yielding gold has gained 31.6% this year, hitting a record high of $2,740/oz, making it one of 2024’s top-performing assets. Analysts cite geopolitical risks, U.S. election uncertainty, and central bank buying as key drivers. Lower interest rates and strong ETF inflows are expected to sustain the rally.7
China Exporters Brace for Tariffs: Chinese exporters are preparing for potential 60% tariffs if Donald Trump wins the U.S. election, which could severely disrupt supply chains and profits. Many companies have already started relocating production to Southeast Asia, while others await the election outcome before deciding. A second Trump term would escalate trade tensions, potentially harming Chinese growth and increasing global economic uncertainty. Meanwhile, Vice President Kamala Harris is expected to maintain a less aggressive trade stance toward China, but still confront Beijing on key issues. Businesses fear higher tariffs will raise costs globally, affecting both Chinese exporters and U.S. consumers.8
U.S. Politics, Policies, and Geopolitics
DOJ Warns Musk Over Sweepstakes: The Justice Department has warned Elon Musk’s America PAC that its $1 million sweepstakes for registered voters may violate federal law, which prohibits paying individuals to register to vote. The PAC, which aims to increase voter registrations in battleground states, initially offered the prize to registered voters who signed a petition. After concerns were raised, the PAC altered its messaging, describing winners as “spokespersons” for the PAC, but the entry terms remained unchanged. Election law experts noted that the revised language does not resolve the underlying legal issues. The DOJ has not commented on the matter publicly.9
Trump’s Plans Threaten Social Security: Donald Trump’s campaign proposals could accelerate Social Security insolvency to 2031, resulting in a 33% cut to benefits, according to a Committee for a Responsible Federal Budget (CRFB) report. His plan to eliminate income taxes on Social Security benefits and enact widespread tariffs would reduce program funding by $2.3 trillion over the next decade. Additionally, the deportation of undocumented immigrants could further lower revenues, as many contribute without claiming benefits. The CRFB projects Trump’s proposals would shrink the solvency window by one-third. Vice President Kamala Harris’s plans, while not significantly impacting solvency, also do not offer specific solutions for the looming shortfall.10
Lawmakers Push Broader Investment Access: Proposed legislation aims to allow individual investors to access private securities by passing a financial literacy exam, moving away from the current wealth-based criteria. Currently, only accredited investors with significant assets or income can participate in these high-risk investments. Supporters argue the change would democratize investment opportunities, while critics warn of the risks posed to less wealthy investors without adequate financial resources. The bill, introduced by Sen. Tim Scott, has garnered support from Wall Street but faces opposition from investor-protection advocates. Its passage is uncertain, with Republicans currently in the Senate minority.11
Latin America Eyes U.S. Election Impact: Latin American markets are closely watching the U.S. election, as Donald Trump’s potential return could trigger volatility, particularly for Mexico. Trade tensions with China and revised USMCA rules could pressure Mexico’s economy, while commodity exporters like Brazil might benefit from redirected Chinese demand. A Trump victory could increase tariffs, strain remittances, and lead to tighter monetary conditions, affecting financial markets across the region. Conversely, a Kamala Harris presidency is expected to reduce tariff risks and boost emerging market assets. Argentina’s President Javier Milei may gain favor under Trump, given their ideological similarities.12
U.S. Confirms North Korean Troops in Russia: The U.S. has confirmed evidence that North Korea sent 3,000 troops to Russia, possibly for deployment in Ukraine, escalating concerns over Russia’s manpower issues. The troops were reportedly transported in October 2024 to training sites in eastern Russia, with a total of 10,000 expected by December 2024. U.S. officials and Ukrainian President Volodymyr Zelenskyy warned of the consequences of North Korean involvement in the conflict. South Korean intelligence noted efforts by Pyongyang to conceal the troop deployments and isolate the soldiers’ families. Moscow and Pyongyang have denied the allegations, dismissing them as “groundless rumors”.13
Xi, Modi Show Unity at BRICS: At the BRICS summit in Russia, Chinese leader Xi Jinping and Indian Prime Minister Narendra Modi signaled a desire for improved relations after years of tension, following a recent deal to resolve their border dispute. Both leaders emphasized the importance of peace and cooperation, with Modi stressing the need for mutual trust and stability. The summit, hosted by Russian President Vladimir Putin, focused on alternative payment systems and trade, but lacked detailed plans. BRICS leaders also addressed global issues, including the Ukraine war and the Middle East conflict, calling for peaceful resolutions. Former Goldman economist Jim O’Neill expressed skepticism about BRICS’ future due to ongoing China-India divisions.14