US Economy Shows Robust 3Q Growth Despite Challenges: JP Morgan

The US economy continues to display resilience with robust growth throughout the year. The third quarter of 2023, in particular, exceeded expectations with GDP expanding at a strong 4.9 per cent seasonally adjusted annual rate, marking the highest quarterly gain since the fourth quarter of 2021.

According to a JP Morgan report, this growth was driven by solid consumer and government spending, along with moderate inventory accumulation.

However, while the recent momentum is impressive, it's unlikely that the pace of third-quarter GDP growth can be maintained in the coming months and quarters.

Several factors contribute to this outlook. Strong consumer spending has been accompanied by a decrease in the saving rate, as households continue to draw down excess savings accumulated during the early stages of the pandemic.

Additionally, the considerable inventory build in the third quarter could potentially hamper growth in the fourth quarter.

Furthermore, ongoing financial tightening is expected to weigh on the economy in the long run. The resumption of student loan payments may also have a dampening effect.

Nonetheless, the late-third-quarter and early-fourth-quarter economic outlook suggests a potential upside compared to a previously projected 4Q GDP growth rate of 1.5 per cent.

Turning to inflation, the Personal Consumption Expenditures report for September shows a slight improvement, with core PCE moderating to 3.7 per cent on a year-over-year basis, 0.1 percentage point lower than in August.

While this marks the lowest level for core PCE since May 2021, it remains elevated compared to the Federal Reserve's long-term target of 2 per cent.

The Federal Open Market Committee (FOMC) is anticipated to leave the Fed Funds target range unchanged at 5.25 to 5.5 per cent during its upcoming meeting while maintaining a bias toward tighter policy and restrictive interest rates in the foreseeable future.

In the automotive sector, tentative agreements were reached between the United Auto Workers union and major companies, Ford, Stellanis, and GM.

Despite the six-week strike's impact on the auto supply chain, it has not significantly affected the broader economy.

In the realm of politics, the election of a new Speaker of the House in Washington is a noteworthy development as it precedes anticipated negotiations over spending bills that are expected to intensify in the coming weeks.

The temporary spending bill passed in late September to avoid a government shutdown is set to fund the government only until mid-November.

Geopolitical tensions in the Middle East and concerns about sustained higher interest rates have continued to weigh on risk sentiment in equity markets.

Despite positive macroeconomic developments and a better-than-expected start to the third-quarter earnings season, the S&P 500 has retreated 11 per cent from its year-to-date high, entering correction territory.

Meanwhile, gold's status as a safe haven asset has contributed to an 11 per cent rally since early October, nearing its all-time high reached in 2020.

High-grade bond spreads have outperformed high-yield bonds amid recent market volatility, with high-grade spreads about 10 basis points wider since September 20th and high-yield spreads approximately 70 basis points wider.

Yields for both high-grade and high-yield bonds are near the highest levels of the past decade.

The US dollar's recent rally has paused, but it's expected to strengthen further through year-end, reflecting the comparatively robust US macroeconomic situation compared to other developed markets.

JP Morgan highlights its corporate risk management capabilities spanning foreign exchange (FX), interest rates, commodities, and equities to support businesses in managing market risks.

The report emphasises the importance of foreign exchange budgeting as a component of a broader risk management strategy.

While initial public offering (IPO) activity saw a September uptick, overall volumes for the year have been subdued when compared historically. In the 15 years prior to 2020-2021, there was an average of 115 IPOs per year raising approximately USD 40 billion in proceeds.

A positive sign for future activity is the strong investor engagement in contemplating deals for 2024 and beyond. (ANI)