The Market Today
3Q GDP Disappoints Expectations on Broad Evidence of an Imbalanced Economy
by Craig Dismuke, Dudley Carter
3Q GDP Disappoints Expectations on Broad Evidence of an Imbalanced Economy: The economic expansion slowed dramatically in 3Q as consumption slowed sharply, inflation took a larger bite out of real growth, business investment disappointed, and exports remained surprisingly weak for this stage of a global recovery. Personal consumption slowed from +12.0% to +1.6% QoQ, SAAR on a 9.2% decline in goods consumption as spending on motor vehicles and parts dropped significantly (see Chart of the Day). Spending in other areas also softened, but not to the degree that was seen in auto activity. Housing activity was down 7.7%, a second quarter of decline. Business investment also disappointed expectations with a 3.2% decline in investment in equipment, an area that had been a consistent growth engine during this cycle. Adding to the weakness, business investment in structures remains weak and was down another 7.3%, now down 21.0% from its pre-pandemic level. Net external trade dragged another 1.2% from the growth tally as exports fell another $57b during the quarter. Exports have not rebounded with the healing of the global economy as the supply chain remains disrupted. Headline inflation was expected to drag 5.3% from the final GDP total, down from 6.1% in 2Q, but instead dragged 5.7% from the total. The rare positive contribution to the report was a slowdown in the reduction of inventories, down just $77b for the quarter versus a $168b decline in 2Q. As a result, inventories added 2.1% to the final GDP tally. Apart from this slowdown in inventory destruction, the economy would have officially contracted during the quarter.
Jobless Claims Beat Expectations Falling to New Lows for Cycle: Initial jobless claims for the week ending October 23 declined more than expected, down 10k to 281k and the lowest level of the pandemic. Continuing jobless claims also fell more than expected and to their lowest level of the pandemic, down 237k to 2.24 million.
Pending Home Sales and Regional Fed Report: September’s Pending Home Sales report is expected to show another positive result at 9:00 a.m. CT. At 10:00 a.m., the Kansas City Fed Manufacturing Activity Index for October is expected to inch lower.
OTHER ECONOMIC NEWS
Democrats Still Haggling Over Spending Items and Pay-Fors: According to a Bloomberg report on Wednesday afternoon, “The head of the House tax-writing committee said a proposal to put a levy on the assets of billionaires has been dropped in negotiations over revenue measures to pay for President Joe Biden’s social-spending bill. The House is discussing with the Senate instead inclusion of a 3% surtax, on top of the top income rate, for those earning more than $10 million, Ways and Means Chair Richard Neal said Wednesday.” However, there continued to be conflicting reports about the pay-fors in the proposed legislation as Democrats seek to reach the framework for a deal this week. On the spending side, a later report from the Wall Street Journal indicated paid family leave had been removed from the framework as a result of ongoing negotiations. President Biden is expected to release the framework of a $1.75 trillion agreement on Thursday, according to news reports.
Bank of Japan Sees Inflation Risks “Skewed to the Downside”: The Bank of Japan announced Thursday that it was leaving its policy tools unchanged. In line with other major central banks, the bank cut its forecast for growth in fiscal year 2021 (ends March 31, 2022) from 3.8% to 3.4%, reflecting broad weakness across multiple sectors which it attributed to supply-chain disruptions and the Delta variant. Evidence officials believe this period will be temporary, the growth forecast for fiscal 2022 was raised from 2.7% to 2.9%. The bank’s inflation outlook, however, is more anomalous. Current inflation levels remain around 0.0% and officials expect it will rise only “gradually.” Although the statement noted a downward revision to the inflation forecast primarily reflected the rebasing of the inflation index, officials believe, “Risks to prices are skewed to the downside.”
Unexciting ECB Statement Shifts Focus to Lagarde’s Press Conference Comments: The European Central Bank made very few changes to their policy statement issued at the conclusion of their meeting on Thursday. At their previous meeting in early September, officials announced a reduction in the pace of monthly asset purchases under its emergency pandemic program, but stressed that it should be viewed as tapering. Today’s statement repeated that the “Governing Council continues to judge that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases.” It’s forward guidance for future rate adjustments was also unchanged. Those topics – the plans for tapering asset purchases and the possibility of faster rate hikes amid inflation pressures – will be the primary focus of today’s press conference. Early in her remarks, Lagarde said high inflation will last longer than previously expected but should still moderate over 2022.
Foreign Volatility Drove Treasury Curve Even Flatter as Rates Swung in Separate Directions: U.S markets tend more often than not to set the tone for daily global trading. On Wednesday, however, Treasury yields were caught up in the wake of volatility in other foreign sovereign markets. Shorter yields in Canada rocketed higher after the Bank of Canada announced it was ending asset purchases as of November 1 and implied a quicker timeline for rate increases amid stronger inflation pressures. Canada’s 2-year yield soared 20.7 bps to 1.07%, the biggest increase since October 2009, while the 10-year yield declined 1.4 bp to 1.61%. Canada’s currency surged. In a counter move, U.K. yields sank across the curve as the government announced a significant reduction in supply over the rest of the fiscal year that surprised market expectations. The 2-year Gilt yield fell 7.3 bps to 0.54% while the 10-year yield slumped 12.5 bps to 0.98%. The 30-year Gilt yield tumbled 18.3 bps to 1.13%, the biggest single-day drop since March 2020. Caught up in the swings, the 2-year Treasury yield rose 3.3 bps to 0.50%, the highest since March 2020, while the 10-year yield slid 6.7 bps to 1.55%, a fourth consecutive decline to a nine-day low. The 10 bps of flattening between the two yields tightened the related spread to 103.6 bps, the lowest since August 23. Despite more solid earnings reports, stocks succumbed to the uncertainty with a late sell-off sending the major indexes to close at session lows. The S&P 500 slumped 0.5%, the Dow fell 0.7%, and the Nasdaq ended flat.
U.S. equity futures recovered early Thursday despite weaker follow-throughs across both Asia and Europe. In addition to corporate earnings, investors were keen to sift through details of the latest policy decisions from central banks in Japan and Europe (more above). There was little evidence on intraday charts that either decision shifted daily trading trends. The Stoxx Europe 600 was roughly flat both before and after the ECB’s announcement. Prior to the press conference, longer European yields were higher while shorter yields were mixed. Just before the release of U.S. jobless claims and GDP data, U.S. equity futures were modestly higher, led by tech, and the Treasury curve had continued to flatten. The 2-year yield was 2.2 bps higher at 0.53%, a new 19-month high, while the 10-year yield had drifted 0.5 bps lower to 1.54%.