Another round of robust U.S. data is set to arrive next week, raising questions in the financial market about whether the economy can continue to avoid buckling under the weight of the highest interest rates in over two decades.
The first revision to fourth-quarter gross domestic product is set to be released next Wednesday, followed the next day by January’s reading on the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures, or PCE, price index.
JPMorgan Chase & Co. JPM, +1.15% has raised its tracking estimate for GDP during the final three months of 2023 to 3.3%, unchanged from the government’s initial estimate released last month, according to economist Daniel Silver. Meanwhile, a team at Morgan Stanley MS, +0.79% expects January’s core PCE, which excludes food and energy, to come in around 0.4% on a monthly basis, versus December’s 0.2% reading, and inflation to remain on a “bumpy path” toward a 2.3% year-over-year core rate for 2024.
“What we are all trying to do is figure out how long the economy can remain this strong with interest rates this high,” said Tom Graff, chief investment officer at Baltimore-based Facet, which manages $ 2.7 billion in assets.
“The Fed could say this is the new norm for where interest rates should be,” he said via phone, referring to the current target for the fed-funds rate of 5.25% to 5.5%. “For stocks, that means all the burden is on earnings, which have carried all the water this year. For bonds, it probably means there’s some upside risk to longer-term yields.’’
On Thursday, a pair of S&P Global surveys revealed that the economy expanded at an above-average rate this month. That data, along with weekly initial jobless-benefit claims that fell to a five-week low of 201,000 in mid-February, helped keep the 10-year Treasury yield BX:TMUBMUSD10Y near its highest level in almost three months. The Nasdaq Composite COMP was also approaching its first record close in more than two years on investors’ enthusiasm over the technology sector, and was up by 2.9% in afternoon trading.
The month of February has already brought a string of solid U.S. data, such as January’s surprising nonfarm-payroll gain of 353,000 and hotter-than-expected consumer-price index report.
“Good economic growth is good for everybody,” Graff said on Thursday. “I’m still bullish on stocks as long as earnings remain strong. If inflation has a meaningful rebound to the 3% or 4% range, that would worry everybody. But if we are bouncing around 2.5% at the end of the year and it comes with good economic growth, stocks will perform well.’’