SCOREBOARD: GDP, gingerly

Wall Street was cautious ahead of the Jackson Hole symposium, despite better than expected US GDP and housing data.

It seems clear that punters are reluctant to do much ahead of the Jackson Hole symposium. Fair enough too, as the scope for surprise or disappointment is significant. Welcome to Bernanke’s new and unstable world.

The thing is, the dataflow was quite positive overnight. Some may suggest that the upward revision to US GDP – up to 1.7 per cent in the June quarter from 1.5 per cent (as forecast), and on the back of stronger consumer spending – still shows the US economy is weak. This is not the case. GDP growth has averaged 2.6 per cent (annualised) over the last three quarters, which is actually above trend and so one of the stronger recoveries on record. Remember that economies are dynamic and potential growth rates change. It is disingenuous nonsense to look at growth over the last 30 to 50 years and state that this is a weak recovery because growth now is weaker than in past recoveries. People who advocate this, including the Fed, forget that trend growth overall is lower now than in the past. The fact is this is a solid recovery.

In any case, last night’s GDP revision probably wasn’t even the best news. It looks increasingly likely that the very subdued lift in housing activity to date may be accelerating, and pending home sales were stronger in July than forecast. They rose 2.4 per cent in the month, compared to expectations for a 1 per cent increase, which lifts the annual pace to 15 per cent. Not bad.

This data was matched by anecdotes in the Fed’s Beige Book (also out last night) where it was noted that "housing markets across most districts exhibited signs of improvement, with sales and construction continuing to increase.” Overall, anecdotes compiled by the Fed suggested "economic activity continued to expand gradually in July and early August across most regions and sectors”. This is broadly consistent with how growth was described last month and so, as yet, there is no sign of stall speed growth. The flipside is there is no sign, for the FOMC at least, of a ‘substantial’ or ‘sustained’ lift in growth. So no report out as yet stands in the way of QE infinity, although this is the talk.

So to QE or not to QE is the concern of the market, which is a big part of why volumes are low and price action mute. Debt markets at least seemed to think the case for QE took a step back last night – if just a small one. So yields rose modestly, with the 10-year up just under 2bps to 1.65 per cent. The 5-year is then at 0.68 per cent and the 2-year at 0.27 per cent. (Aussie futures did little, with the 3s at 97.41 and the 10s at 96.905). Then US equities were broadly flat, with the S&P up 0.1 per cent (1410), the Dow up 0.03 per cent (13107) and the Nasdaq up 0.1 per cent (3081).

Bigger moves were actually seen in the commodity space, especially crude which dropped 1.2 per cent to $95.2. Hurricane Isaac hit, as predicted, as a category 1 hurricane and the fact that it missed oil platforms drove crude down. Copper (-0.8 per cent), silver (-0.6 per cent) and gold (-$11 to $1658) were all weaker as well. Other than that, and for the price action, it’s just worth mentioning that euro is off about 27 pips to $US1.2530 as I write and the Australian dollar is about 35 pips or so weaker to $US1.0348.

Bits and pieces otherwise. ECB hear Mario Draghi seemed to firm up the case for bond buying when he wrote in the press that "it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools." He went on to add that "when markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area." Italian and Spanish bond yields then eased overnight, 9-11bps to 5.68 per cent and 6.42 per cent respectively.

More news from Europe suggests that the Greek government is close to deal on austerity, which will be announced before the troika report on that economy. German CPI rose 0.3 per cent in August, which was stronger than the 0.1 per cent forecast, to be 2 per cent higher annually.

Looking at the day ahead the SPI suggests Aussie stocks will ease off slightly (-0.2 per cent) and then in addition to a handful of company earnings reports, we get Australian capex data today at 1130 AEST (3 per cent gain expected) alongside building approvals (5 per cent fall expected). Tonight we see German employment figures and the European business climate indicators. In the UK, we see mortgage approvals and then US data includes personal income and spending and chain store sales.

That’s about the lot, so have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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