Strong GDP, tight labour market dim hopes for further rate cut
What was expected to be a simple U.S. gross domestic product (GDP) revision turned into a strong surprise. Second-quarter growth was revised up to 3.8%, the strongest pace in almost two years, driven by stronger consumer spending and a bigger contribution from private investment. Household consumption alone added 1.7% to the total, inventories subtracted more than 3% and net trade added almost 5%. The biggest shock was how much spending jumped, rising from 1.6% to 2.5% despite continued rumours that households are feeling the pressure. Inflation was revised upward too, a sign that the U.S. Federal Reserve (the Fed) still has work to do.
But the most important part wasn’t the data itself, it was how the market reacted. Traders immediately trimmed their rate cut expectations, and fewer than four cuts are now priced in through the end of next year. Strong growth and sticky inflation give the Fed less breathing room, and Chicago Fed President Austan Goolsbee pushed back against calls to cut aggressively. Stocks fell for a third straight day, the U.S. dollar strengthened, and 10-year Treasury yields pushed closer to 4.20%.
After a strong rebound in August, September’s flash Purchasing Managers’ Index (PMIs) softened. Manufacturing slipped to 52.0 and services dipped to 53.9, both still signalling expansion but below last month’s readings. Even with that slowdown, the data still points to a third quarter growing at about a 2.2% annualized pace, which would be the best stretch of the year so far.
The details show a mixed picture. Hiring momentum has slowed. Tariffs continue to drive up costs, but fewer companies are passing those costs along, which should help keep inflation in check. On the downside, inventories are building quickly in the manufacturing sector, which could mean slower production later in the year if orders soften. Business sentiment improved slightly thanks to the prospect of lower rates but remains below its long-term average as politics and trade remain big unknowns.
If you were expecting the U.S. labour market to finally crack, jobless claims had other plans. Initial claims fell to 218,000 last week, well below expectations and another sign that employers are holding on to workers even as hiring cools. Continuing claims barely moved, sitting at just under 1.93 million. The strong labour data came alongside a wave of upbeat numbers. Durable goods orders jumped 2.9% in August. Even housing is showing signs of life, with new home sales up more than 20% from the previous month. Together, the data points to an economy that remains in good shape despite higher rates and trade uncertainty. The Fed can afford to remain patient, and while markets still see two more cuts before the end of January 2026, the chances of a rapid easing cycle are shrinking.
Overall, it was a quiet week. Strong data pushed back expectations for aggressive rate cuts and reminded investors that good economic news doesn’t always mean good news for markets. Next week brings the usual start-of-month data: manufacturing surveys, jobs numbers and fresh inflation prints. That will help clarify whether the economy is still running too hot for the Fed’s comfort.
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