The Market Today
3Q Growth Revised Up to 3.3% Making it the Best Quarter for the Economy Since 2014
by Craig Dismuke, Dudley Carter
Today’s Calendar – 3Q Growth Revision Tops Estimates on Stronger Business Spending: Economic growth in the third quarter was revised up more than expected in this morning’s first revision to the advance release. The initial growth rate of 3.0% was revised to 3.3% (0.1% better than expected) which pushed 3Q ahead of 2Q’s 3.1% tally and made it the best quarter for the U.S. economy since 3Q 2014. The components of the revision were somewhat unexpected with the gain in consumer spending revised down 0.1% to 2.3% compared with expectations for a positive 0.1% revision to 2.5%. A portion of the weaker spending was driven by an unexpected tick higher in the core PCE price index which was taken up from 1.3% QoQ to 1.4% QoQ. The biggest driver of the overall revision was private investment which accounted for just over 0.2% of the total 0.3% change. Business fixed investment drove most of the improvement on a mix of stronger activity in equipment and intellectual property and a weaker result for business structures. The drag from residential investment, or housing activity, was slightly smaller than in the initial report. The initial boost from inventories was also more accretive after revisions, with companies’ accumulation of products to sell to consumers now adding 0.8% of economic activity. With revisions to private investment accounting for two-thirds of the total revision, the other primary drive was a smaller negative contribution from state and local government spending which accounted for roughly 0.1% of additional growth in 3Q. Trade was nearly unchanged. Bottom line: As expected, economic activity in 3Q was stronger than projected in the initial release. Although the revision to consumer spending was directionally inconsistent with expectations, the story of a healthy U.S. consumer is unchanged. The bigger boost from businesses is an obvious positive for the economy and has potentially larger ramifications. Weak business investment has been blamed for the sluggish productivity growth during this expansion which has in turn been one theory for why wages have been sluggish. On in the inflation front, the unexpected uptick in the core PCE index should give the Fed some comfort that inflation is stabilizing.
At 9:00 a.m. CT, Chair Yellen will appear before the Joint Economic Committee of Congress in what could be her last formal appearance as Fed Chair. Her opening statement was released earlier this morning and helped push Treasury yields and the Dollar higher (more below). At the same time, pending home sales data for October will be released and are expected to rebound 1.0% from an unchanged result in September. At 12:50 p.m. CT, San Francisco Fed President Williams will speak at an economic luncheon ten minutes before the Fed releases its latest Beige Book.
Overnight Activity – U.K. Assets in Focus after Brexit Developments, Yellen’s Statement Gives U.S. Yields and the Dollar a Boost: Sovereign yields rose overnight as global equities strengthened in Europe despite a mixed performance across the Asian-Pacific. Markets largely ignored continued developments related to yesterday’s missile launch by North Korea, who later boasted that the projectile had the ability to reach most of the mainland U.S. With North Korea not much of a contributor to the overnight session, the standout performances were seen in U.K. markets. The notable moves in U.K. assets followed a report yesterday that representatives from the U.K. and European Union had reached an agreement on the Brexit “divorce bill”; that initial deal will have to be approved by larger groups from both parties. The topic had been a sticking point for broader negotiations and could lead to advancement of talks about the future relationship between the two regions. The British Pound extended yesterday’s initial rally in the overnight session which has weighed heavily on the FTSE 100 (-0.50%). Yields on U.K. debt rose sharply as well with the 2-year yield up 5.6 bps and the 10-year yield 8.2 bps higher. Elsewhere, the Stoxx Europe 600 fared more favorably with a 0.71% gain marking the best day for the index in almost two weeks. Rising yields in the U.K. also pressured other sovereign yields higher with the 10-year yields in Germany and France up 3.0 bps and 2.2 bps. Ahead of this morning’s U.S. GDP report and after Chair Yellen’s prepared remarks for her appearance before Congress later today, U.S. equity futures had maintained yesterday’s upward momentum, Treasury yields were near their highs of the day with the 2-year up 1.4 bps and the 10-year up 3.0 bps, and the Dollar had erased an overnight drop and was at its daily peak.
Yesterday’s Trading Activity – Stocks Surge to New Records but Treasury Yields Remain Stuck in a Day Packed with Economic and Political Headlines: U.S. stocks rose Tuesday with all three indices recovering from roughly an hour of midday weakness to close at new all-time highs. The Dow led with a 1.1% gain, the index’s fourth strongest day of 2017, and became the second of the majors to gain more than 20% for the year. The Nasdaq crossed the 20% mark back in September while the S&P remained just under 3%-points shy of the milestone. Financial companies within the S&P rose 2.6% to lead the broader index to a 0.98% daily gain; its sixth strongest session of the year. Investors had much to contemplate on Tuesday. After early morning economic data disappointed, the later reports showed consumer confidence rose unexpectedly to its highest level in 17 years (more below) and the YoY change in the S&P Case-Shiller Home Price Index notched its fastest reading since July 2014 (more below). In addition, Fed Chair nominee Jay Powell told members of the Senate Banking Committee that “the case for raising rates at [the December meeting] is coming together” during his confirmation hearing (more below). Tax reform remained a topic du jour as the Senate Banking Committee advanced the GOP’s tax plan to a full Senate vote that could occur as soon as this week. The march towards the debt ceiling and expiration of the current authority on December 8th received renewed focus as well after top Democrats declined to attend a meeting at the White House to discuss keeping the government open because of a morning tweet from the President. Oh, and North Korea fired another ballistic missile (the reason for the midday weakness), the first since September. Even with all of the activity, Treasury yields remained lifeless; the 2-year yield rose just 0.6 bps to 1.75% while the 10-year yield was unchanged at 2.33%.
Home Prices Rose at the Fastest Pace Since the Summer of 2014 According to S&P: The S&P Case-Shiller Home Price Index showed home prices within some of the largest U.S. metro areas rose 0.52% in September which lifted the YoY rate to 6.19%, the fastest pace since July 2014. More broadly, prices rose by a slightly smaller 6.15% nationally in September compared to the August pace of 5.95%. In the FHFA’s home price report, prices were up 6.4% from September of last year, a slower pace than was seen over the previous seven months. Nonetheless, the trend continues to show steadily increasing home valuations over the last several years. While actual housing activity has been mixed over the last 12 months and affordability continues to be the primary concern for the industry, the continued price appreciation did not appear to significantly impact sales over the last couple of months. Both existing and new home sales were better than expected in September and October.
Fed Chair Nominee Jay Powell’s Confirmation Hearing No Fireworks Show: The tone of Fed Governor Jay Powell’s remarks during his confirmation hearing before the Senate Banking Committee were consistent with the content of his opening remarks released on Monday. Powell said he sees no signs of the economy overheating and expects growth of 2.5% for the full year of 2017 and something close to that in 2018. However, with labor force growth slowing he commented that it’s important for policymakers to focus on boosting the longer-run growth rate. On current status of the Fed’s progress in achieving its mandate, he said certain indicators are signaling that the economy is at or near full employment but wage growth could be indicating that there is potentially additional slack to be absorbed. Powell stressed that achieving the 2%-inflation goal is important for the Fed’s credibility and that if the Fed determines the trends rate for inflation is lower, it could adjust and hike more slowly. However, he said the Fed has been patient with removing accommodation but it should continue gradually normalizing rates, adding that the case for a December hike is coming together.
Consumer Confidence Unexpectedly Hits New 17-Year High: Consumer confidence rose unexpectedly in November according to the latest report from the Conference Board, with the headline index hitting its highest level in 17 years (since November 2000). The unexpected bounce was driven by gains in consumers’ assessments of both the current conditions (best since 2001) and future expectations (best since 2000); the expectations index saw the biggest improvement. General business conditions were seen as improved and the labor market continued to be a major driving force behind the optimism. Consumers had a better outlook on employment opportunities with the difference between those who believe jobs are plentiful and those who see jobs as hard to get reaching 20.2%, a new high for the cycle. However, a similar comparison of expectations for incomes to increases versus decrease remained within its year-to-date range at one if its best levels of the cycle but eased from the October result. As to indicators of economic activity, fewer reported plans to buy an automobile over the next six months while more expected to buy a home. The responses related to financial indicators reinforced recent trends in the actual data: inflation expectations one year ahead eased to match the lowest level since 2005 and the share of respondents expecting the equity bull market to continue jumped to one of its strongest levels on records back to the late 1980s.