US Growth Broadens As Yields Rise  

• Treasury yields resumed their climb this week with two-year yields approaching 5% and 10-year yields just off their post-pandemic highs. The potential for a higher neutral real rate is one reason yields are rising. Not only has real GDP growth held up at 2%+, but it also appears to be broadening away from services spending. A strong retail sales reading on August 15 would confirm that the goods spending is once again expanding.
• Treasury yields are rising. One of the most important structural drivers of the move higher in yields is building evidence that the neutral real rate of interest, is at least temporarily more elevated. If that’s the case it would mean a more extended period of higher rates would be warranted and that longer-term yields might need to rise higher to slow the economy.
• The focus of spending in the US shifted to services after the pandemic, and this made strong GDP growth look less sustainable. Recession expectations were partially premised on services spending slowing down without other components of growth offsetting the services slowdown.
• Instead of softening as projected, Q2 GDP showed a broadening of growth to categories like business equipment investment. Housing which had been a drag is now poised to offer a positive contribution in Q3.
• The manufacturing sector is in contraction, but Purchasing Managers Index PMI) and Institute for Supply Management (ISM) readings are just sub-50 and stronger durables orders across categories suggest above-50 readings may not be far off. Relatedly, it appears that goods spending is once again expanding.

(Source: Citi Research)