The Penn Valente Group at Baird

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The bond market has been wild last couple of weeks.

Long-term Treasury yields had climbed above 5.25%, and the debate is over why. Some blame inflation fears, others point to massive government deficits, while another camp believes stronger economic growth and AI-driven capital spending are pushing rates higher as demand for capital increases.

While I admit that America absolutely has a long-term debt and deficit problem, the recent rise in yields doesn't necessarily signal a fiscal crisis. Instead, higher rates may be reflecting a combination of resilient growth, huge AI infrastructure investment, and a bond market demanding more compensation to lend money long term.

AV Bottom line: Higher yields are creating headwinds for housing and borrowing, but they may also be signaling a stronger economy rather than an impending collapse.

Time will tell.

I have a lot friends who are realtors so this might hit close to home (no pun intended)....but the new home sales data from yesterday was eye opening.

Housing remains one of the weakest areas of the economy. New home sales fell more than 10% in July as higher mortgage rates and affordability challenges continue to keep buyers on the sidelines. The encouraging news is that builders have plenty of inventory and prices have come down from their 2022 peaks, with incentives helping move homes.

AV Bottom line: housing is still struggling, but improving affordability and rising inventory could provide some support if rates stabilize.

Personal Income rose .4% in July.. my thoughts:

Consumer is hanging in there, but not thriving. Income growth came in better than expected, and spending is still rising, but after accounting for inflation, real consumer spending was essentially flat in July.

The bigger issue is inflation. The Fed's preferred measure (Core PCE) rose 0.2% in July and is now running at 3.3% year-over-year, well above the Fed's 2% target and actually higher than a year ago. At the same time, consumers are saving only 3.0% of disposable income, near historically low levels, which suggests spending may be getting supported by a shrinking financial cushion.

AV Bottom Line: The economy isn't rolling over, but it's not accelerating either. Consumers are still spending, incomes are still growing, and recession fears remain low. However, inflation remains stubborn, which likely keeps the Fed on pause and rates higher for longer, rather than opening the door to aggressive rate cuts.

The headline 1.5% GDP growth looks soft, but the underlying economy was stronger than it appears. Consumer spending, business investment, and housing (the economists' "core GDP") grew at a robust 4.2% annualized pace, suggesting private-sector demand remains healthy.

The bigger story is that corporate profits surged 9.1% in Q2 and 22.8% year-over-year, the strongest growth in years, led by technology and energy companies. That's a positive signal for the economy, although stock valuations look rich.

The concern is inflation. GDP inflation was revised up to 6.4%, well above the Fed's 2% target. Even so, much of the inflation spike appears tied to energy shocks from the Iran/Hormuz disruption, so feels like the Fed to remain on hold rather than resume rate hikes immediately.

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