Scoreboard: Good growth, big falls

Strong US growth failed to impress investors, while the ECB delivered an unexpected rate cut, making for confusing moves on the markets.

US growth was quite a bit stronger than forecast, coming in at 2.8 per cent for the third quarter when 2 per cent was expected. This is good growth, above the 2.5 per cent that we saw in the second quarter and nearly half a percentage point above trend. Predictably nearly all the commentary I’ve read on the figure has been negative, but luckily, that’s as wrong now as it has been in the past.

In terms of the breakdown, consumer spending was a bit weaker, providing 1 percentage point of that 2.8 per cent growth, net exports provided about 0.3 percentage points and for the first time in about three quarters, government spending didn’t subtract from growth. The reason there is some contention about this figure is because business investment provided 1.5 percentage points of growth for the quarter and of that, inventories were about 0.8 percentage points. Naturally the argument is that because inventories were such a strong proportion of growth, then the truth is the result was woeful otherwise. This is wrong.

The fact is that this is the first decent lift in inventories in about a year, as the expansion proves to be stronger than expected. The best way to think of the rebound is firms restocking in preparation for continued decent growth going forward. They have understated the amount of stock they’d need on hand, pretty much for the last two years. This is not surprising when day in and day out we’re dealing with double dips, a debt crisis or weak jobs growth. But the fact is we’re not. The expansion is solid and jobs growth is strong. Yet policy makers need to justify why they continue to print money - and so this is a ‘weak’ and ‘uncertain’ recovery.

I’m surprised stocks fell then and falls were big - with about an hour left to trade, the S&P500 was off 1 per cent (1752), the Dow had lost 122 points (15624) and the Nasdaq was down 1.6 per cent. How you interpret that fall though is open.

If GDP was accepted as a good result and punters are worried this makes a taper more likely, then they shouldn’t worry because it doesn’t. The Fed has said this quite clearly. They need time, because years of a strong recovery isn’t quite enough for them to be sure. No, the fact is the Fed isn’t going to taper soon - if you think the result was a good one.

And for those who don’t think the result was a good one, it’s just one more reason to prolong QE. Either way the result should have been good for stocks.

It’s fair to say that moves in Europe were more mixed and in fact the Dax hit a new record rising 0.4 per cent. Otherwise the CaC was down 0.1 per cent and the FTSE was off 0.7 per cent. Confusing moves. But then it was a confusing night with the strong/weak US growth figures and a surprise cut from the ECB. Yep, the ECB are worried by deflation now - well disinflation - and so thought that a cut to 0.25% from 0.5% would make all the difference. It did to the euro I guess, which fell over two big figures to 1.3306 soon after, although it subsequently clawed back some of those losses to sit at 1.3426 as I write.

Elsewhere, the Australian dollar lost another 20 pips (0.9452) following a decent fall after the employment figures yesterday. Commodities were then generally weaker - crude off another 0.4 per cent ($103.6) on WTI and 1.2 per cent on Brent ($103.6). Copper was then flat and the US 10-year bond yield fell 4 bps to 2.64 per cent.

There were a few other bits and pieces which didn’t attract as much attention. Jobless claims in the US fell again in the week to November 2 (336k from 345k), while over in Germany, industrial production fell 0.9 per cent to be 1 per cent higher annually. Finally, the BoE met but made no adjustments to policy.

Looking at the day head, the SPI suggests our stocks will be off about 0.4 per cent and then in terms of news and data flow, we get the RBA’s Statement on Monetary Policy at 1130 AEDT. They’ll update us on their view and I suspect there will be plenty for everyone, hawks and doves, although the statement overall will be written with the Australian dollar firmly in mind. I would expect them to make decent upward revisions to both growth and inflation forecasts. They should do this to be credible, although I don’t think they will, given their sensitivity over the exchange rate.

Outside of that. US payrolls will be the key focus. The market expects 125,000 jobs to be created in October with the unemployment rate forecast to rise to 7.3 per cent from 7.2 per cent. There is a run of Chinese data also out either today or tomorrow - industrial production, retail sales and the inflation figures.

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