Latest / Markets with Megan: A Quick Financial Markets Update / The Fed's 3.1% Inflation Problem Just Got Worse | S3 E 176 | 10-29-26

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The Fed's 3.1% Inflation Problem Just Got Worse | S3 E 176 | 10-29-26 · Markets with Megan: A Quick Financial Markets Update

• 0:00
  Megan Horneman: This morning we rounded out really the bulk of the third quarter economic data that we'll get and also the biggest reports that we'll get before next week's midterm election.
• 0:09
  Megan Horneman: It's Thursday, October the 29th, and this is Markets with Megan.
• 0:13
  Megan Horneman: If you like this podcast, you can subscribe, hit the alarm bell, share with friends, family, colleagues, anybody who's interested in that headline news that tends to move markets on a regular basis.
• 0:23
  Megan Horneman: Well, today was a big one.
• 0:24
  Megan Horneman: Let's dig into some of the things that we got today.
• 0:27
  Megan Horneman: The first thing that we got was the report on personal consumption.
• 0:31
  Megan Horneman: So this includes not only personal income, personal spending, but also the Fed's preferred inflation gauge, that PCE core reading.
• 0:40
  Megan Horneman: What we saw that was personal income was weak, it came in less than expected, and spending was much higher than that income level.
• 0:49
  Megan Horneman: So it resulted in consumers just dwindling down that savings rate further.
• 0:54
  Megan Horneman: So the savings rate right now is at 3.8%.
• 0:57
  Megan Horneman: That's the lowest level that we've seen since October of 2022.
• 1:02
  Megan Horneman: And if you take the 30-year average prior to the COVID pandemic, which which can which screw cont tended to misconstrue several different economic reports, that average reading was only five was 5.9%.
• 1:17
  Megan Horneman: So much weaker than that reading that we saw prior to COVID.
• 1:21
  Megan Horneman: When we look at the the core PCE, that the Fed's preferred inflation indicator, it came in at um 3.1% on a year-over-year basis.
• 1:29
  Megan Horneman: So it's up a tenth from the last month.
• 1:32
  Megan Horneman: It was as expected.
• 1:33
  Megan Horneman: It's the highest that we've seen since May of this year after the war impact that we got in prices.
• 1:39
  Megan Horneman: Again, this is going the wrong direction for the Fed.
• 1:42
  Megan Horneman: The Fed's target is 2%.
• 1:44
  Megan Horneman: Now we're going higher at 3.1%.
• 1:46
  Megan Horneman: The GDP, we actually also got the first reading on the third quarter GDP.
• 1:51
  Megan Horneman: And what we can say is that inflation still is a problem, but it's not really slowing down the consumer or the capex spending.
• 1:58
  Megan Horneman: So when you look in the details here, GDP rose 3.4%.
• 2:04
  Megan Horneman: That was the best since the second quarter of 2025.
• 2:07
  Megan Horneman: So solid reading at 3.4%.
• 2:10
  Megan Horneman: That's better than the last quarter, which was only 2.2.
• 2:13
  Megan Horneman: Personal consumption matched the gain that we saw last quarter at 3.8%, although the majority of that increase was seen in the service side of the spending.
• 2:23
  Megan Horneman: Now let's dig into that CapEx number that's really been supporting economic growth for the last year.
• 2:29
  Megan Horneman: Um, the fixed investment that rose that when you look at non-residential, the non-residential fixed investment rose 12.7%.
• 2:38
  Megan Horneman: That was the most since 2020.
• 2:41
  Megan Horneman: Now residential um residential investment declined.
• 2:45
  Megan Horneman: We know the housing market's really frozen right now.
• 2:48
  Megan Horneman: That's because of higher mortgage rates, higher costs.
• 2:50
  Megan Horneman: Um, but we do get a big increase here on the non-residential.
• 2:54
  Megan Horneman: The equipment side of that was up over 20%, 20.9%.
• 2:59
  Megan Horneman: And if you isolate out really that true CapEx spending number, that's information processing equipment as well as software.
• 3:07
  Megan Horneman: Software, that's now making up seven and a half percent of GDP.
• 3:10
  Megan Horneman: So that's a record high.
• 3:12
  Megan Horneman: Um, net exports were a big drag.
• 3:15
  Megan Horneman: Um, that took off about 3.3% of GDP.
• 3:18
  Megan Horneman: So, and that's all from the import side.
• 3:20
  Megan Horneman: If we did have if that was less than that, we may even have a bigger number from GDP.
• 3:25
  Megan Horneman: Now, uh what we also like to look at is a really core core number for GDP, and that's the final sales to private domestic purchasers.
• 3:34
  Megan Horneman: That's going to exclude trade, so the the net export number.
• 3:38
  Megan Horneman: It's also going to exclude inventories, which actually did increase as well for the quarter.
• 3:43
  Megan Horneman: We have what we're seeing here is that growth at that with that at that indicator is growing 4.9%.
• 3:50
  Megan Horneman: That is the best we've seen since the third quarter of 2021.
• 3:54
  Megan Horneman: And it's on the back of that number growing 4.6% last quarter.
• 3:59
  Megan Horneman: So, what does all this tell us?
• 4:01
  Megan Horneman: Um, the economy is still doing well.
• 4:03
  Megan Horneman: Um, it's likely going to continue to expand into the fourth quarter, even into 2027.
• 4:09
  Megan Horneman: It's highly dependent, though, on this CapEx spending boom.
• 4:13
  Megan Horneman: The consumer has been a good addition, however, it's on that service side.
• 4:18
  Megan Horneman: This is sticky, so it's harder for consumers to pull back on that spending.
• 4:22
  Megan Horneman: But with that savings rate so low and it just continues to go lower and lower.
• 4:26
  Megan Horneman: Consumers now are moving from just dialing up credit card debt to now dwindling down their savings.
• 4:32
  Megan Horneman: How much further they can withstand these rise in prices, we do not know.
• 4:36
  Megan Horneman: But we know this isn't a good sign, really, for household budgets.
• 4:39
  Megan Horneman: The only thing holding them afloat is the fact that the labor market remains intact.
• 4:44
  Megan Horneman: The Federal Reserve, what this does for them, it pretty much solidifies the interest rate hike in December.
• 4:50
  Megan Horneman: They probably should have done something yesterday, but they didn't.
• 4:53
  Megan Horneman: In fact, I think that they were a little bit too dovish for my liking.
• 4:56
  Megan Horneman: But December definitely, in our opinion, is on the table that they will raise interest rates.
• 5:01
  Megan Horneman: And we don't see any of the factors that are driving inflation changing between here and the end of the year.
• 5:07
  Megan Horneman: So we think there's more rate hikes into the first quarter of 2027.
• 5:11
  Megan Horneman: Now, the equity markets are down today.
• 5:14
  Megan Horneman: This has a lot to do with earnings.
• 5:15
  Megan Horneman: We had some disappointing earnings on the tech side.
• 5:18
  Megan Horneman: So this tech sell off is continuing as well today.
• 5:22
  Megan Horneman: Um, we'll we'll get some more information next week on the economy as we round out the rest of this year.
• 5:27
  Megan Horneman: But if you like this podcast, you can go back to the history of them at marketswithmegan.fm.
• 5:32
  Megan Horneman: Thank you.