Friday’s session really didn’t offer much in the way of excitement, what with US markets mixed around zero again and European market receiving a modest bid. Again the macro flow was positive and the new news came from US GDP, which was a bit stronger than expected (1.8 per cent), rising 2 per cent for the third quarter. The vast bulk of that growth was provided by consumers. Business investment added virtually nothing (with a small detraction to growth provided from inventories), government investment added 0.7 per cent while net exports took off a bit. Combined, inventories and net exports took off about 0.3 percentage points from growth.
So where does the US economy sit? Clearly we’re not talking about stall speed growth anymore or double dip recessions. By itself this is a very positive development for market sentiment: neither was ever a high probability.
The argument now, provided by people who want the Fed to continue to print money and monetise debt, is that growth isn’t sufficient to bring the unemployment rate down and provide jobs. However, the data shows this view is also incorrect. Looking at the annualised figures, growth at 2 per cent is slightly below trend (2.4 per cent) but then again, annual growth at 2.3 per cent suggests the economy is closer to trend than that. I would say then that best judgement is the US economy growing at a trend or slightly below trend pace. For this phase in the cycle though, we’re actually looking at one of the stronger recoveries.
I think this is a very positive development and the market in general agrees, given that we’ve seen a decent rally in global stocks since June. Others would suggest that record low interest rates point to a different expectation but this is wrong. Low interest rates reflect central bank printing presses. Full stop. Overall for the week though global stocks are softer, the S&P500 is down 1.5 per cent, with the Dax off 1.3 per cent. As I highlighted last week I don’t think we can really say this reflects anything. The rally since June has been strong. It’s just that there isn’t much happening at the moment and of course we’ve got the US presidential elections, China’s national congress and the fiscal cliff theatrics. Political uncertainty is the problem not the macro fundamentals and some people have opted to take some profit – fair enough.
I don’t see to many macro influences changing that in the early part of this week. The data flow is light – we get things like US income and spending (September), the Dallas Fed manufacturing index and the conference board’s consumer confidence index. It’s in the last part of the week when the tempo picks up a bit. There are two key updates in the ISM manufacturing report on Thursday night and US payrolls on Friday.
These are always important releases but more so now when there is so much debate about the health of the US economy and both of the indicators, alongside recent GDP numbers, signal an uptick. Recall that last month, both surprised markets in one way or another. The ISM surprised by bouncing over 50, the US employment report surprised because of the sharp drop in the unemployment rate driven, not by a surge in payrolls but a surge in the household employment measure, from which the unemployment rate is derived. They were so pivotal because prior to this data, people had become much more pessimistic on the US economy again. For this month there is ample scope for a surprise in either direction – forecasts are very neutral and unfortunately data is volatile. The consensus is that the ISM will remain little changed at 51, while for payrolls 120,000 jobs are expected. The unemployment rate is forecast to rise to 7.9 per cent.
For Australia it's going to be quiet. The SPI suggests that the All Ords will to and fro the rest of the week the focus will be purely global as there is very little happening from a domestic macro perspective this week. The deputy governor of the RBA gives a speech on Tuesday night; we get building approvals from the ABS on Wednesday alongside private sector credit numbers. Trade prices, commodity prices and the producer price index follow on Thursday and Friday.
Finally and elsewhere abroad it's worthwhile looking out for German inflation data on Tuesday alongside the European business climate indicator. Wednesday sees German employment data and apart from that there are a couple of Chinese manufacturing PMIs on Thursday.
Have a great week…