The Atlanta Fed’s GDPNow growth estimate for Q3 holds steady at 3.4% after the latest data on US housing starts and building permits. On September 17, the GDPNow model forecasted a real GDP growth rate of 3.3% annually, down slightly from 3.4% on September 16. Following the US Census Bureau’s housing starts report, the forecast for third-quarter real residential investment growth dropped from -4.6% to -6.3%. However, this change did not affect the overall GDP growth estimate.

Next GDPNow Update

The next update for GDPNow will be on Friday, September 26. The current growth estimate of 3.3% indicates that the wider economy is strong, contrary to expectations of a slowdown due to higher interest rates. This ongoing economic strength supports a positive outlook for major market indices. We should keep in mind that this resilience may lead the Federal Reserve to keep its current policies in place longer than expected. The significant revision in the residential investment forecast, now at -6.3%, highlights the challenges in the housing market. Reports indicate that 30-year fixed mortgage rates are around 6.9%. This situation has led to tight housing inventory and a nearly 14% drop in sales volume year-over-year based on August data. As a result, traders might consider buying put options on homebuilder ETFs (XHB) to target this specific weakness. The strong overall growth data makes it unlikely that the Federal Reserve will cut interest rates in the near future. With the effective Federal Funds Rate steady at about 4.75% and core inflation still above 3%, the market should eliminate any dovish expectations for the rest of the year. Strategies that benefit from higher interest rates, like shorting Treasury note futures, may be favored in this environment.

Market Volatility Outlook

The contrast between a robust economy and a struggling housing sector is likely to cause volatility. While a strong growth figure is positive for S&P 500 futures, concerns in the rate-sensitive housing market require caution. Options can be used to create trades with limited risk, such as buying call spreads on the SPX to capitalize on potential gains while minimizing losses if the housing market weakness worsens. A similar trend occurred in late 2023 when the economy consistently exceeded forecasts, even as the impact of rate hikes was expected. During that period, growth-focused sectors performed well, while rate-sensitive sectors like real estate lagged. This historical context supports a strategy of staying invested in technology and industrial indices while hedging against or shorting the real estate sector in the upcoming weeks. Create your live VT Markets account and start trading now.

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