Today's capital market segment is brought to you by Alpaca. Bond markets are enduring a severe quarterly selloff, pushing 10 year U.S. Treasury yields to 24 year highs near 5.3%. While revised GDP shows a resilient U.S. economy, August consumer spending picked up and softer core PCE inflation has prompted traders to scale back bets on an October Fed rate increase. Still, elevated energy costs, expanding fiscal debt and heavy corporate bond issuance continue to drive borrowing costs higher across the curve.
Well, joining us live this morning here at the New York Stock Exchange to break down the macro outlook and also weigh in on Fed policy is Jeffrey Roach, chief economist at LPL Financial. Great to have you here. Thank you so much for joining me.
Good morning. Thank you.
Well, here we are. We are kicking off the final quarter of 2026. And what a year it has been. So let's start off by looking at the 10 year Treasury, which does remain elevated above that 5.3% level, what is that telling you?
Well, I think for first and foremost, it's telling us that growth is strong. So, so many people focus really on the inflation side of things. And yields are certainly responding to the inflation pressure. But let's not forget that part of the reason why yields are going higher is because there's incredible demand for capital.
There's a competition for cash, as we say. And so the fact that we're growing pretty well, it doesn't seem like we're letting up on the accelerator. That I think is one main driver for why yields are higher.
Yeah. So I do want to talk about the other drivers of what is driving global bond markets to sell off and yields higher. So here we are following a slew of U.S. economic data. And of course I do want to get your take on core PCE. But for Americans who are watching and they're watching inflation weigh on their wallets, what would you tell them?
Well, inflation is most obviously showing up on gas prices. Part of it is because that's what we've been focusing on, not just unleaded regular fuel that we put in our vehicles, but also the diesel story, which is what fuels our truck drivers that are moving goods across the country. So inflation is somewhat in a foggy period right now.
And so as we explain to our listeners, the fact is we do think inflation will ease up by the end of the year, maybe early next year. The challenge has been that we have a Middle East crisis. We have challenges geopolitically. And so what we thought was going to happen with inflation, say, in Q1 of this year is not happening, but perhaps it's just being pushed out a little bit, not necessarily that we're in a new regime per se.
Sure. And of course, when it comes to the energy complex, we're keeping a close eye on oil prices. But diesel prices have been hitting record highs. And when it comes to those refined products, there is concerns as we head into year end and for other regions of the globe that have to deal with colder weather and less supply.
What does all of this mean when it comes to the global economy?
Well, I think we ought to remember that diesel really impacts kind of the underlying belly of the economy. So talk about transportation from cargo transportation, ships and cargo that's transported on our semi tractor trailers. And so the fact that diesel is being hit with such high costs now certainly risks the idea that some of these inflation pressures are going to seep in to the rest of the economy.
And I think at this point, it's it kind of behooves us to say, let's get a resolution. The sooner the better to the geopolitical challenges, the sooner we can get some resolution on diesel prices.
And here we are about a month away from the midterm elections. And as you mentioned, politics, geopolitics do come into the equation here. But of course, when we are looking ahead to year end, there's seasonality to keep in mind and the artificial intelligence trade. So here we are coming off Micron earnings.
And when it comes to CapEx as well as fiscal spending, where do you stand and what does that mean for the average American?
Well, I do think that the CapEx story does continue, and that's one of the reasons why we don't think there's a recession in the near term. We still think CapEx could add to growth even if the consumer pulls back a little bit. It's interesting. Some of the soft data from Conference Board we got earlier this week suggested that there is some idea that the consumer might pull back a little bit, but offsetting that is this demand for CapEx.
And that certainly does seem to have some legs to it. It's not just kind of in the last few quarters, this could continue from a CapEx side well into 2027.
And of course, we are paying attention to what's happening on Main Street as well as Wall Street. And we have to take a look at what happened in terms of stock market performance for Q3. So we do continue to hover near record highs, but that does hinge on earnings. And we're counting down to the official start of earnings season.
So what are your expectations and where are the areas for concern?
Right. Well, we do see some soft data suggesting that consumers are a little bit nervous. The hard data doesn't back that up yet. And that's the challenge about where we are now very, very near term. I think it's helpful for listeners to remember I believe it's early next week. We have a Prime Day, Amazon Prime Day, very, very early beginnings of that holiday sales spending.
And what that does is it helps us reveal a little bit more on the behavioral side of the consumer and how the trajectory is going to be going into 2027. So the hard data is still looking very good. The soft data is looking a little bit softer and more concerning.
And of course here we are less than 24 hours away from the U.S. employment report for the latest month. And while we're talking about a low, high or low fire economy, of course labor market data is key, especially when it comes to some key demographics as well as data points. But what will you be paying attention to and what are your expectations?
Right. So Friday, 8:30 Eastern time. Get the latest on payroll numbers. I do think it will be very helpful to get tease out what we're seeing in some of the wage data, average hourly earnings. It's very, very important. We're starting to see a little bit of pressure on income growth, not keeping up with inflation in the last couple of months.
And so we want to see if that's going to be able to kind of be reversed. Another thing that we're looking at is just some of the pressures on the labor force participation rates. We know that unemployment's very, very low. We know that payroll growth has been a lot stronger than anticipated. And so we need to see, well what's happening with the rest of the economy, that perhaps those categories of folks that aren't even in the labor force, we need to see some improvement there.
Yeah. And of course, all of us will be paying attention to all parts of that jobs report, including nonfarm payrolls, the unemployment rate, as well as participation and wage growth. Tomorrow morning, as you mentioned, at 8:30 a.m. Eastern time. But what does all of this mean when it comes to the central bank of the U.S., the Federal Reserve?
Well, we do have some interesting dynamics because we know with the new chairman, Kevin Warsh, not interested in providing what he calls forward guidance. The offsetting side of this is we still have a lot of these members of the Board of Governors and district presidents that do go out on the speaking circuit.
So in some ways, we do have some guidance. We're not completely in the dark. And at this point, we do think that there's probably going to be one more hike the rest of this year. They're meeting two more times, probably not hiking both of those times. Maybe they pause in October. They hike in December or vice versa.
So it's October and December. The remaining we do expect, perhaps if inflation doesn't ease, particularly in the energy sector, there's certainly going to be some more volatility going into 2027 about where rates are going to be.
And of course, while we're talking about rates, I do want to get your take on the housing markets. So I'm sure a lot of Americans out there have been keeping an eye on mortgage rates, so the 30 year fixed does remain above that 7% level. So what are the long term impacts here and what are you concerned about when it comes to rates?
Well, in terms of housing, I think the most important factor is to remember the affordability component. So rates are ticking higher. Interestingly enough, the latest numbers we got on existing home sales suggest that almost 27% of those home sales were done with all cash deals, meaning that there's not a sensitivity toward the interest rate environment like other buyers are.
So the fact is that there's still this demand for buying, particularly in the Southeast. Very, very different than what we're seeing in the Northeast and the West and Midwest. And we're still seeing immense pressure on affordability. Probably not going to get any resolution quickly on the mortgage rate story, because tied to so many other factors, including the 10 year.
But we do need to see some improvement on housing supply. We need to see home builders start to tick up their activity and accelerate their activity of home buying. That would offset some of the pressure on housing affordability.
Yeah. And while I have you here, Jeffrey, I do want to ask you about the R word, and that is recession. So I know that I've asked you about concerns regarding stagflation in the past, but how low is the risk of recession right now?
Well, I would say recession risks are probably below 20% in the sense that we know that so much of the U.S. consumer is on pretty decent footing, particularly those baby boomers. They have plenty of cash. That's powering a lot of what we're seeing in terms of spending, OpenTable, reservations on restaurants, travel, TSA throughput.
All this activity we have, we have households that are pretty decent shape, as I said, some sectors, and we also have a business sector that's very interested in continuing that CapEx spend. Certainly expectations that things will slow down from this breakneck speed that we're seeing, but we're not seeing risks of recession at this point.
And finally, before I let you go, you and I are sitting here on the floor of the New York Stock Exchange. And when we're looking at the Dow, the Nasdaq, the S&P 500, we could be on track for yet another year of double digit percentage gains. But if we do see some cracks when it comes to earnings and that affects the equity markets, what are the risks especially when we're talking about the K shaped economy.
Right. So we have seen capital markets do very, very well partially because we had such low expectations last year thinking things are just really going to fall off the cliff. And it did not happen. And so there's kind of that resetting of expectations that yes, indeed we are doing okay. I think some of the things we need to think about, particularly in, in the tech space, but I like to always focus on the financial space.
Think about the risks of an economy going back in history to a great financial crisis, other crises that do start in a financial sector. So I'm always looking at some of the risks there in the banks and financial services. At this point, though, things do look pretty good.
And finally, less than 60s. What are you paying attention to as we head into year end?
Well, I think holiday sales, that's that's always key because it really sets the stage for next year. So going into the holiday sales, that gives us a good snapshot on the consumer. From the business side, I'm looking at the data coming from the Fed, the senior loan officer opinion survey that gives us an idea of how well and easy conditions are for borrowing, particularly like commercial and industrial loans, CNI loans, we call them for short.
And that's helping get a good picture on how the business side is doing. That's what I'm looking at for the rest of the year.
Well, Jeffrey, always appreciate your time. Thank you so much for joining us as we head into the final quarter of this year. Thank you. Thank you.
