On October 27, GDP data for the third quarter were released.
Third quarter GDP rose a strong 2.6% year-over-year, which not only exceeded market expectations of 2.4%, but also ended the previous 鈥technical recession鈥 - two consecutive quarters of negative GDP growth in the first half of the year.
GDP turned from negative to positive territory, meaning that the Fed鈥s sharp interest rate hike was not the perceived threat to economic development.
One can assume that positive economic data is often a sign that the Fed will continue to raise interest rates aggressively, but the market has not responded consistently.
This data has not dispelled expectations for a 75 basis point hike in November, but it has increased expectations for a 50 basis point hike (the first slowdown in rate increases) at the December meeting.
The reason is that this seemingly good GDP data is actually full of 鈥feint鈥 in terms of specific structure.
How 鈥feint鈥 was GDP in the third quarter?
As we can see, personal consumption expenditures are the largest component of the U.S. economy, averaging about 60% of GDP, and are the 鈥backbone鈥 of U.S. economic growth.
However, a further decline in the share of GDP accounted for by personal consumption expenditures in the third quarter represents a continued contraction in the economy鈥s growth pillar and is seen by many as a harbinger of recession.
In addition, the growth rate of other sub-items has also declined. So, who is actually supporting economic growth in the third quarter?
Next exports contributed 2.77% to GDP growth in the third quarter, so it can be said that GDP growth in the third quarter was almost supported by exports 鈥alone鈥.
The reason for this is that the U.S. exported record amounts of oil, gas and weapons to Europe due to the ongoing Russia-Ukraine conflict.
As a result, economists generally assume that this phenomenon is temporary and will not persist in the coming quarters.
This surprising GDP figure is probably just a 鈥flashback鈥 before the recession.
When will the Fed turn the corner?
According to the latest model data from Bloomberg, the probability of a recession in the next 12 months is a staggering 100%.
Image Source: Bloomberg
Add to that the fact that the inverse trend in 3-month and 10-year U.S. bond yields, which are considered indicators of a recession, is widening, and recession fears once again have a grip on the market.
Against this backdrop, interest rate hikes are forced into a dilemma - will the Fed cut rates in the event of a recession?
In fact, in the four recessions of the past 30 years, the Fed has adjusted interest rates in a particular pattern.
Because recessions are often accompanied by rising unemployment and falling consumer demand, the Fed typically begins cutting rates three to six months after interest rates peak in an effort to stimulate the economy.
While the Fed may be reluctant to turn the tide too quickly and cut rates, if the recession continues over the next year, the Fed will likely decide within six months of rates reaching their final value to stop raising or lowering rates to stabilize the economy.
When will interest rates fall?
Over the past thirty years, mortgage rates have fallen whenever the economy has entered a recession.
However, when the Fed lowers interest rates, mortgage rates generally do not fall again as quickly.
In the last four recessions, 30-year mortgage rates fell by an average of about 1% within a year and a half of the start of the recession.
Affordability for homebuyers is currently at an all-time low, but for many more potential buyers, a severe recession will likely bring the risk of job loss or lower wages, further increasing affordability.
The 75 basis point rate hike in November was uncontroversial, and the biggest question is whether the Fed will signal a 鈥taper鈥 in December.
If the Fed hints at a slowdown in rate hikes later this year, mortgage rates will also take a breather at that time.
