Inflation-adjusted GDP measures the value of U.S. goods and services. GDP increased at a revised 3.8% in the second quarter of this year. The Commerce Department had previously estimated Q2 growth at 3.3%. This new data has dramatically changed information about the economy.
This change was directly correlated to strong consumer spending. Q2 domestic demand and service spending were revised, which brought up overall Q2 spending. Business investment in equipment and intellectual property was also revised up. Imports have declined at a rate of 29.3%.
Guidance on Q3 GDP looks strong as well. The Atlanta Fed revised its Q3 estimate from 3.3% to 3.9%. The U.S. consumer remains bifurcated, yet it paints a picture of a stronger consumer than we thought. As a reminder, Q1 saw the first dramatic GDP drop in three years, which was caused by an increase in pull-forward imports. However, forecasters expect economic growth to increase in 2026 based on Trump’s tax law and “lower” rates.
The Fed’s preferred measure of inflation — the Personal Consumption Expenditure (PCE) — rose 0.2% from July to August and remains sticky at 2.9%, higher than the Fed’s 2% inflation mandate.
The stubborn inflation print makes several Federal Reserve policymakers hesitant to lower rates further. In the September meeting, the vote on a 0.25% percentage point cut was 11–1, with Governor Stephen Miran dissenting (he wanted a 0.50% percentage point cut).
In the July meeting, two members (Bowman and Waller) dissented, preferring cuts over holding steady. So far, the clear doves advocating for a rate cut are Bowman, Goolsbee, and Miran. The hawks, Musalem, Schmid, and Cook are against a rate cut. The swing votes are from the dataphiles: Powell, Jefferson, Barr, Waller, Williams, and Collins.
Currently, the options market is pricing a 25-basis-point rate cut with an 89% probability for October. However, the critical piece would be the employment report for September.
As far as the Fed’s take on the equity markets, in a press conference in Rhode Island, Chair Powell said, “By many measures, for example, equity prices are fairly highly valued.”
Even though the market dipped for a few days, there is a big difference between Powell and his predecessor. Powell’s “fairly highly valued” remark is much softer than Alan Greenspan’s “irrational exuberance” (or even Janet Yellen’s “substantially stretched”). It’s closer to a polite nudge than a full-blown warning. That makes it unlikely to trigger a policy shift — but it does signal that the Fed is uncomfortable with the speed and magnitude of the equity rally.
Correction —
In last week’s commentary, we mentioned the delay of the PCE Index release. The delayed inflation release was the annual Consumer Expenditure Survey. We at CDI pride ourselves on transparency and accountability, so this is a “mea culpa” — our bad. The error was a result of capturing a popular search engine’s AI Overview and not going to the source document. It serves as a great reminder that AI may still require some human intervention!
CHANGES IN RATES
Treasury Market
The front end of the Treasury curve rallied in yields. The 2/10-year spread stayed range-bound at 53 basis points. That is 2 basis points flatter than last week.
Municipal Market
In the municipal market, the muni curve has been flattening. The 2/10-year spread flattened to 0.67%, 16 basis points lower than last week’s 0.83%.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios widened week over week.
Investment Grade Corporates
Investment grade corporate bond yields moved higher week over week.
Congress is facing a critical deadline. If lawmakers don’t pass a funding bill by midnight of Sept. 30, the federal government will shut down.
A Republican-backed short-term funding bill passed the House but was blocked in the Senate by Democrats, who are pushing for health care provisions like reversing Medicaid cuts and extending insurance subsidies. President Trump initially agreed to meet with Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries to discuss government funding, but later canceled, calling their demands “unserious and ridiculous.” With Congress out of town until Sept. 29, both parties are blaming each other for the looming shutdown. Democrats accuse Trump and Republicans of refusing to negotiate, while Republicans push for a clean funding bill without policy riders.
If the shutdown hits, it will be the fourth in the past decade.
President Trump has threatened to reassert federal control over D.C.’s police force. The president also ordered the military to deploy to Portland, Oregon to protect ICE facilities, authorizing them to “use full force, if necessary.” In response, Portland Mayor Keith Wilson stated, “The president will not find lawlessness or violence here unless he plans to perpetrate it."
The 5-year Breakeven Inflation Rate finished the week of Sept. 27 at 2.34%, 1 basis point lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.38%, 1 basis point lower than last week's observation.
The 10-year quality credit spread between BBB revenue less AAA general obligation bonds for last week was at 0.74% versus a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
Investment grade spreads are extremely tight at 0.72%, compared to a historical average of 1.57%. The high-yield spread is lower at 2.59%, compared to a historical average of 4.57%. We believe that both these markets are overpriced on a spread basis.
Money Market Flows (millions of dollars)
Money market fund flows were largely up last week.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were up from the week prior, with the exception of high yield and municipals.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced decreased cash flows for the last reported period.
This week’s tax-exempt market is expected to be low, at approximately $7.7 billion.
America appears healthy, with consumers continuing to spend. Q2 GDP has been revised with positive momentum for Q3. PCE continues to stay elevated, but unsurprising and range-bound at 2.9% YoY. Chair Powell’s comments create a dip in the stock market, as he referred to the equity market as highly valued.
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.