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By Scott McIntyre
Co-Head of Investment Management
HilltopSecurities Asset Management
This morning, the Bureau of Economic Analysis reported the U.S. economy grew at a better-than-expected +3.4% inflation-adjusted annualized pace in the third quarter. Although it was the strongest headline GDP reading since Q3 2025, the underlying data was even more impressive. Consumer spending was surprisingly robust for the second straight quarter as personal consumption rose +3.8%, contributing 2.5 percentage points to the headline. Business fixed investment jumped +12.7%, adding 1.7 percentage points as the massive A.I. buildout continues. Restocking of business inventories contributed 1.6 percent, while government spending jumped +5.3%, adding 0.9 percentage points.
On the downside, net trade subtracted a whopping 3.3 percentage points, as exports fell -5.7% while imports surged +19.7%. The jump in imports reflects efforts by U.S. companies to secure foreign purchases before the next round of tariffs begins, as well as purchases necessary for the construction of data centers and other A.I. infrastructure. Residential investment (housing) fell -3.3% as mortgage rates climbed for much of the quarter.
Gross domestic purchases (which exclude net trade) increased +6.6%, the strongest since Q1 2021. Real final sales to private domestic purchasers (which subtracts business inventories, government purchases and net trade, and is considered to be a cleaner measure of economic growth) rose +4.9% during the quarter.
Also released this morning, the PCE deflator for September rose +0.5% bringing this annual inflation measure up from +3.4% to +3.6%. Personal income and spending were both below forecast in September, while real personal spending was flat and the savings rate slipped from 4.0% to a three-year low of 3.8%. The combination of rising inflation, a stagnant spending pace and dwindling savings suggests strained consumer capacity …although admittedly, this lingering concern has yet to play out.
Bond yields are lower in early trading despite the GDP strength and further indications of rising prices, which would normally push yields upward. This morning’s rally mostly reflects a flight-to-quality away from tech stocks, which are under pressure after Google reported disappointing third-quarter earnings yesterday afternoon. On a positive note, this morning’s bond rally suggests the U.S. Treasury market remains a safe harbor for investors.
The futures market is currently indicating a 79% probability of a quarter-point rate hike in December, while pricing-in another 25 bp increase by the second quarter of 2027.
About Scott McIntyre, CFA
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Scott McIntyre specializes in investment management services and is responsible for the management, oversight and trade supervision of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Scott also provides investment advice and consulting, reviews local government investment policies, formulates overall investment strategies, evaluates account performance and oversees the day-to-day operations. He is a member of the Chartered Financial Analyst (CFA) Institute and a CFA Charterholder, a two-term advisor to the GFOA Treasury and Investment Management (TIM) committee, a Registered Investment Advisor, and holds FINRA Series 7, 24, 63, and 65 licenses.
About Greg Warner, CTP
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Greg Warner specializes in investment management services and is responsible for the management and oversight of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Greg coordinates all client services and portfolio management duties, including security evaluation and portfolio analysis, trading, investment reporting, board presentations, and monitoring of broker-dealer relationships. He is an advisory committee member to the Texas Association of Counties, a member of the Government Treasurers’ Organization of Texas (GTOT), a Registered Investment Advisor, a Certified Treasury Professional (CTP) and holds FINRA Series 7, 63, and 65 licenses.
About Matt Harris, CFA
As HilltopSecurities Asset Management’s Senior Portfolio Advisor, Matt Harris specializes in investment management services for public sector municipal clients. He developed his experience in the banking industry, supporting balance sheet management, interest rate risk analysis, liquidity planning, and investment strategy implementation. At HilltopSecurities, he works closely with clients to develop and implement customized investment strategies, oversees account documentation and reporting, and assists clients with the public funds depository review process, including competitive RFP evaluations. Harris is a member of the CFA Institute and a CFA Charterholder, a Registered Investment Advisor, and holds FINRA Series 7, 63, and 66 licenses.
The paper/commentary was prepared by HilltopSecurities Asset Management (HSAM). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS and/or HSAM as of the date of the document and may differ from the views of other divisions/departments of Hilltop Securities Inc. and its affiliates. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. Sources available upon request.
HilltopSecurities Asset Management is an SEC-registered investment advisor. Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. HTS and HSAM are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, Texas 75201, (214) 859-1800, 833-4HILLTOP.