It’s getting harder for the Fed to continually talk down the US economy. Data out last night showed US third-quarter GDP revised up to a very strong 3.6 per cent growth rate, a full 1 percentage point above trend and 0.8 per cent above the previous estimate. This is the strongest growth since the first quarter of 2012.
To be fair though, the revised estimate largely reflected higher inventories and over time that’s a meaningless result. For the now though it probably reflects a period of catch-up. The fact is people have been pessimistic on this expansion phase for a long time and so firms were keeping inventories tight – too tight – and this surge in inventories reflects the fact that US business is expecting this expansion phase to continue. They’re saying it’s sustainable, which is something the Fed should be taking note of.
Whether it’s the fact that the upgrade was driven by inventories or whether it’s because people are simply bored with all the taper talk, the stronger US GDP number had only a muted impact in the market. ‘Good-bad news’ arguments could have been made for either a rally on the stronger data or a massive sell-off on taper fears, but we got nothing.
At the time of writing the S&P500 was down 0.2 per cent (1789) and only traded on a 5-point, or 0.3 per cent, range the whole session thus far. Meanwhile the Dow was off 25 points and the Nasdaq was flat (4040).
It’s probably also true to say that the market is waiting for payrolls tonight, as we saw little action on US Treasuries as well – just over 1 bps to 2.85 per cent on the 10-year Treasury note at the moment. The ‘good-bad news’ is that payrolls could be very strong (but no doubt disappointing in this bizzario world that we live) if the partial indicators are any guide. Recall that the ADP employment report showed jobs surging – well, we can add to that initial jobless claims figures out last night which also point to a strengthening labour market. The latest numbers show that claims fell to 298,000 in the week to November 29, from 321,000.
Otherwise for the price action, we saw the Australian dollar about 25 pips higher at 0.9063. The euro was 60 pips higher, perhaps on the view that the European Central Bank was no nearer to providing further stimulus. The yen was then at 101.7, while gold fell $15.7, unwinding some of the gain of the previous session to sit at $1231. Copper is down 0.7 per cent and crude rose 0.5 per cent on West Texas Intermediate ($97.7) but fell 0.4 per cent on Brent ($111.07).
Bits and pieces otherwise. In Europe, both the ECB and the Bank of England met and neither moved to provide, or remove – as is the increasing expectation for England – stimulus. As for the ECB, it appears happy with policy where it is at the moment, but talked about remaining policy tools it could use if needed. That the ECB head, Mario Draghi, spent more time talking about lifting credit to the private sector suggests the bank would explore this route first.
As for the data, and back to the US, about the only downside came from a 0.9 per cent fall in factory orders in October, although that follows a 1.8 per cent gain the month prior. The Atlanta Fed President Dennis Lockhart (non-voter), meanwhile, said the time was nearing for the Fed to taper (really Dennis, you are a genius!) but he said that this would only be appropriate as long as policy overall remained highly stimulatory!
So for our market today, the SPI suggests we can expect a 0.4 per cent fall, while on the calendar there’s not much to expect for our session – no real data to speak of and it probably wouldn’t matter if there were, because punters will likely be waiting for payrolls tonight.
The consensus for payrolls is that 183,000 jobs were created, which is a strong result. The unemployment rate itself is expected to slip to 7.2 per cent from 7.3 per cent. Other than that we get US personal income and expenditure, the Fed’s Charles Plosser (non-voter) speaks as does Charles Evans (voter), while we also get consumer credit numbers and the Michigan Uni’s estimate of consumer confidence for December.
Have a great weekend…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.