The Atlanta Fed GDPNow growth estimate for Q3 remains steady at 3.4% following the latest US housing starts and building permits data. The GDPNow model predicted real GDP growth at a 3.3% annual rate on September 17, a slight decline from 3.4% on September 16.
After the US Census Bureau’s release on housing starts, the prediction for third-quarter real residential investment growth dropped from -4.6% to -6.3%. Despite this change, the overall GDP growth estimate was unaffected by the housing data.
Next GDPNow Update
The next update for GDPNow is scheduled for Friday, September 26.
The latest growth estimate of 3.3% suggests the broader economy remains strong, defying expectations of a slowdown from higher interest rates. This continued economic momentum supports a bullish stance on broad market indices. We should consider that this resilience may push the Federal Reserve to maintain its current policy stance for longer than anticipated.
The sharp drop in the forecast for residential investment, now at -6.3%, directly reflects the strain on the housing market. We can see this in the latest reports showing 30-year fixed mortgage rates holding near 6.9%, which has kept housing inventory tight and sales volumes down nearly 14% year-over-year according to August data. This suggests traders could look at put options on homebuilder ETFs (XHB) as a targeted way to play this specific weakness.
This strong overall growth data makes a near-term interest rate cut by the Federal Reserve highly unlikely. With the effective Federal Funds Rate holding steady around 4.75% and core inflation still stubbornly above 3%, the market should price out any dovish expectations for the remainder of the year. This environment favors strategies that profit from interest rates remaining elevated, such as shorting Treasury note futures.
Market Volatility Outlook
The divergence between a robust economy and a contracting housing sector is likely to create volatility. While the headline growth number is positive for S&P 500 futures, the cracks in the rate-sensitive housing market warrant caution. We could use options to construct trades with defined risk, such as buying call spreads on the SPX to capitalize on upside while limiting potential losses if the housing weakness spreads.
We saw a similar dynamic unfold in late 2023, when the economy consistently outpaced forecasts even as the full effect of rate hikes was expected to hit. During that time, growth-oriented sectors outperformed while rate-sensitive areas like real estate lagged. This historical precedent supports a strategy of staying long on technology and industrial indices while hedging against, or shorting, the real estate sector in the coming weeks.
