Highlights for this week include:

• Third quarter economic growth came in much better than originally expected while early readings for the fourth quarter remain consistent with further economic growth.
• Inflation indicators continue to recede, with interest rate markets now signaling no more interest rate hikes this year. While the Federal Reserve (Fed) will be data-dependent, this potentially removes a major headwind for stocks.
• While the 10-year Treasury yield around 5.0% presents a headwind for stocks, better-than-expected economic growth should support profit growth, which provides the ultimate support for stock prices.

October Business Surveys and Chicago Fed National Activity Index Support Soft Landing Narrative

The S&P Global Flash U.S. Composite PMI is a timely business survey of both manufacturing and service activity that provides an early reading of the current month’s economic activity. Encouragingly, the October reading reached a three-month high, as private sector growth momentum picked up early in the fourth quarter. Both services and manufacturing activity improved. Combined with lower overall price pressures, this supports the soft economic landing (no recession) narrative.

Manufacturing has been a source of concern but is now showing signs of stabilizing. The Flash Manufacturing PMI edged up out of contraction territory for the first time since April. Factory output grew at the quickest rate in six months, while new orders increased at their best pace in over a year. That was largely driven by stronger domestic demand, as export orders continued to sag amid dollar strength and challenging economic conditions abroad.

Importantly, the survey signaled a further drop in inflationary pressures. Despite higher oil prices, firms’ input cost inflation fell sharply to the lowest since October 2020, and average selling prices for goods and services posted the smallest monthly rise since June 2020. The survey’s selling price gauge is now close to its pre-pandemic long-run average and consistent with headline inflation dropping close to the Fed’s 2% target in the coming months.

The Chicago Fed National Activity Index (CFNAI) is also consistent with a sustainable economic expansion. The September reading rose, and its three-month average climbed to its best level in nearly a year. All four broad categories of indicators increased, suggesting more segments of the economy registered stronger performance at the end of the third quarter. This bodes well for the sustainability of the current expansion.

Third Quarter Economic Growth Better than Expected with Lower Inflation

Third quarter economic growth was much stronger than expected with GDP coming in at a very impressive 4.9% annualized growth rate. The strength was driven by both consumer and government spending.

In another sign of lower inflationary pressures, the core PCE deflator (important inflation reading closely monitored by the Fed) was slightly below expectations at 2.4%. This reading is also moving much closer to the Fed’s 2.0% inflation target after climbing as high as 6.0% last year. Indeed, the CME FedWatch Tool is now indicating a 99% chance of no rate hike at the November Fed meeting and a 79% chance of no rate hike in December, suggesting the Fed is done raising interest rates for this cycle.