Unadorned Notes: September 25-26, 2024
U.S. Current GDP Growth Confirmed; U.S. Previous Growth Revised Upward; OECD Raises Global Growth Outlook; Cash Inflows to Money Markets Surge; Gold Hits Record Highs
Economics and Finance
U.S. Current GDP Growth Confirmed: The U.S. economy grew at an annualized rate of 3.0% in the second quarter of 2024, according to the Bureau of Economic Analysis’ third estimate. First-quarter growth was revised up to 1.6% from 1.4%, and recent data revisions indicate stronger economic growth in 2023 than previously estimated. Gross Domestic Income (GDI) surged at a 3.4% rate in the second quarter, up from an initial estimate of 1.3%. The average of GDP and GDI, known as gross domestic output, rose 3.2% in the second quarter, revised from an earlier 2.1% estimate.1
U.S. Previous Growth Revised Upward: The U.S. economy grew 2.9% in 2023, revised from a previous estimate of 2.5%, due to higher business investment and consumer spending. Corporate profits were sharply revised up by $288.5 billion, or 8.9%, reflecting increased pricing power amid rising inflation. Gross Domestic Income (GDI) increased 2.8% in 2022, narrowing the gap with GDP and addressing concerns about overstatements of economic health. The average of GDP and GDI, known as gross domestic output, rose 2.3% in 2023, up from an earlier 1.5% estimate. The saving rate for 2023 was adjusted to 4.7%, with minor downward revisions for previous years.2
OECD Raises Global Growth Outlook: The OECD forecasts global economic growth at 3.2% for both 2023 and 2024, slightly raising its 2024 outlook from 3.1%. It expects the impact of central bank rate hikes to diminish, with potential interest rate cuts boosting future consumer spending. The U.S. economy is projected to slow to 1.6% in 2025, while Eurozone growth is forecast to nearly double to 1.3% in 2024 as rising incomes outpace inflation. The UK economy’s forecast was upgraded to 1.1% growth in 2024 and 1.2% in 2025, due to high wage growth.3
U.S. Capital Goods Orders Increase: U.S. core capital goods orders rose by 0.2% in August 2024, following a revised 0.2% decline in July 2024, indicating unexpected growth in business spending plans. Core capital goods shipments edged up 0.1% after a 0.4% fall in the previous month, impacting third-quarter GDP calculations. Durable goods orders remained unchanged in August after a 9.9% surge in July, with gains in electrical equipment, machinery, and electronics. Transportation equipment orders fell 0.8% as commercial aircraft orders dropped 7.5%, partly due to Boeing’s production and safety issues. The Federal Reserve recently cut its interest rate to 4.75%-5.00%, potentially easing borrowing costs for businesses.4
Mortgage Rates Hit Two-Year Low: The average U.S. 30-year fixed-rate mortgage fell to 6.08%, the lowest since September 2022, according to Freddie Mac. This decline has boosted refinancing activity, with applications surging by 20% last week, though overall activity remains modest compared to past years. Sam Khater, Freddie Mac’s chief economist, noted that many homeowners are refinancing to lower their monthly payments. However, potential homebuyers are waiting for further rate decreases as more economic data becomes available.5
U.S. New Home Sales Decline: New single-family home sales fell 4.7% in August 2024 to an annual rate of 716,000 units, despite declining mortgage rates. July 2024 sales were revised up to 751,000 units, with similar upward adjustments for May and June 2024. The median home price decreased 4.6% year-on-year to $420,600, and inventory rose to levels not seen since 2008, with a 7.8-month supply. Falling mortgage rates have increased buyer interest, but some potential buyers are waiting for further rate decreases before purchasing. Economists expect modest growth in new home sales for the remainder of 2024, supported by lower mortgage rates and limited supply of existing homes.6
Cash Inflows to Money Markets Surge: Investors have poured $126 billion into money-market funds following the Federal Reserve’s interest rate cut, pushing total assets to a record $6.76 trillion. Current yields on these funds stand at around 4.9%, attracting investors despite falling rates. Some analysts argue that cash is being shifted from traditional bank accounts, not necessarily signaling a return to the stock market. Cash allocations remain elevated, hovering around 17% in August 2024, compared to a low of 13.8% in January 2020. Experts suggest interest in money-market funds may persist until yields drop to approximately 3%.7
China Unveils Stock Market Boost: China’s central bank announced an 800 billion yuan ($114 billion) package to support stock market recovery, including a 500 billion yuan swap program for securities and a 300 billion yuan relending facility for banks. The CSI 300 Index rose over 7% since the announcement, turning positive for the year. However, analysts remain skeptical of the plan’s long-term impact, as it does not address China’s weak economic fundamentals. The 2015 stock bubble, inflated by margin lending, raises concerns about potential risks associated with the current approach. Local governments, potential beneficiaries, may see limited returns despite low-cost funding for share purchases.8
Gold Hits Record Highs: Gold prices reached a new all-time high of $2,670 per ounce, gaining 29% in 2024 amid expectations of further Federal Reserve rate cuts. The Fed’s recent 50-basis-point cut lowers the opportunity cost of holding non-yielding assets, potentially redirecting more investment into gold. Ongoing geopolitical tensions, including conflicts in the Middle East and Ukraine, further strengthen gold’s role as a portfolio hedge. Central banks and investors continue to drive demand, with gold ETF inflows rising for the fourth consecutive month. Analysts project a target of $2,700 per ounce in the coming months, citing gold’s attractive hedging properties.9
U.S. Politics and Geopolitics
Biden Signs Three-Month Funding Bill: President Joe Biden signed a stopgap funding bill, extending government funding until December 20, 2024, and averting a shutdown. The bill provides an additional $231 million for the Secret Service amid increased security concerns. It passed with bipartisan support, with the House voting 341-82 and the Senate 78-18. House Speaker Mike Johnson initially attempted a more conservative proposal, but pivoted to the narrower bill to secure Democratic support. Both chambers of Congress are now adjourned until after the November 2024 elections.10
NYC Mayor Adams Indicted Federally: New York City Mayor Eric Adams has been indicted on five federal charges, including bribery and wire fraud, for actions dating back to 2014. The indictment alleges that Adams accepted luxury benefits and illegal campaign contributions, including from a Turkish official, in exchange for favors. Adams has denied wrongdoing and vowed to continue his duties, stating he looks forward to defending himself in court. The investigation has led to searches of Gracie Mansion and seizures of devices from several city officials. Prominent political figures, including New York Governor Kathy Hochul, have expressed concern, though calls for Adams’ resignation remain mixed.11
Harris Meets Zelenskyy; Trump Criticizes: Vice President Kamala Harris recently met with Ukrainian President Volodymyr Zelenskyy, a move that has been criticized by former President Donald Trump. Trump has opposed continued support for Ukraine and advocated a quick end to the war, even if it favors Russia. President Joe Biden announced $2.4 billion in new security assistance for Ukraine, emphasizing U.S. support against Russian aggression. Zelenskyy’s visit to Biden’s hometown and comments about Trump’s running mate, J.D. Vance, have further heightened partisan tensions over Ukraine policy. Harris and Biden reiterated their commitment to supporting Ukraine “for as long as it takes”.12
China-Linked Hackers Target U.S. ISPs: Chinese government-linked hackers, known as Salt Typhoon, recently infiltrated several U.S. internet service providers to access sensitive data and potentially launch cyberattacks. This operation is part of Beijing’s expanding cyber capabilities, including prior efforts such as Flax Typhoon, which infected over 200,000 devices with malware. Another group, Volt Typhoon, aimed to compromise critical infrastructure like ports and utilities, potentially disrupting U.S. military logistics. U.S. officials disrupted some of these operations last week. FBI Director Christopher Wray has warned that China’s hacking efforts surpass those of all other nations combined.13
China Conducts Pacific ICBM Test: China conducted a rare intercontinental ballistic missile (ICBM) test over the Pacific Ocean, marking its first such launch in over four decades. The test, part of what China claims to be routine annual training, was seen as a warning to the U.S. and its allies amid regional tensions, especially in the East China Sea and Taiwan Strait. The test aligns with China’s recent military buildup, including expanding its nuclear arsenal. The U.S. received advance notification, but Japan reported not being informed directly.14