‘Information-rich’ environment

US growth is accelerating and inflation is re-heating, so the Fed’s pause is likely temporary and equity markets face a near-term correction.

• Third-quarter GDP grew 3.4% quarter over quarter, above the Bloomberg consensus of 3.2%, after growth of 2.2% in the second quarter and 2.5% in the first.
• Private domestic final sales, which exclude inventories, trade and government spending, rose 4.9%, a five-year high; consumption increased 3.8% and corporate spending 12.7%, while residential construction fell 3.3%.
• Corporate investment was driven by a 21% rise in equipment spending, and third-quarter S&P 500 revenues and profits were up 13% and 30% year over year, following second-quarter gains of 15% and 52%.
• Energy prices have revived inflation: WTI rose 65% from $67 in early July to $110 per barrel, while September core CPI accelerated to 2.6% year over year and core PCE reached 3.1%.
• The Fed voted 10-2 to keep rates at 3.75%-4.00%, while 10-year Treasury yields reached 5.36% in late September before declining to 4.91%; the author expects quarter-point hikes in December and March.

Takeaway: Strong growth and rising inflation support further Fed tightening, while a hawkish policy shift, the US midterm elections and higher energy prices could trigger a temporary equity correction, particularly in large-cap growth and technology stocks.