The Market Today

Economy Beats Expectations Expanding Another 3.5% in 3Q: The economy expanded a surprisingly strong 3.5% in 3Q following 2Q’s 4.2% growth, marking the best back-to-back quarters of growth in four years.  The strong results brought the YoY rate of growth up from 2.9% to 3.0%, the all-time-high ninth consecutive quarter of YoY acceleration.

 

Growth was driven higher by a stellar showing from consumers and a massive rebuild of business inventories, along with smaller gains from business investment in research, positive results from government spending, and weaker-than-expected gains in inflation.  Personal consumption rose 4.0% after a 3.8% jump in 2Q, the best back-to-back quarters since 2014.  Inventories, which were unusually depleted in 2Q, rose $76 billion adding 2.1% to the tally.  The QoQ change in inventories was the largest swing since the recession.

 

Business investment was mixed with investment in structures falling 7.9% QoQ but investment in research up 7.9%.  Investment in equipment was surprisingly soft, up 0.4%.  Residential investment was discouraging, down 4.0%, the fifth quarter of the last six showing a decline.

 

Exports fell $23 billion, the third largest quarterly decline since the recession.  Meanwhile, imports rose a massive $75 billion.  All told, the trade deficit widened $98 billion and dragged 1.8% from the final GDP tally.

 

As expected, government spending has ramped up with overall spending up 3.3%, federal spending up 3.3%, and state and local spending up 3.2%.  The biggest gains at the federal level came from defense spending which rose 4.6%. Collectively, the contribution from government spending was the third strongest of the cycle.

 

Core PCE for the quarter, which adjusts nominal growth into real growth, rose just 1.6% which was weaker than the expected increase of 1.8%.

 

All told, the 3Q GDP report was extremely strong thanks to an impressive showing from consumers, an inventory rebound, and government spending.  Business spending was less encouraging and will be key to watch going into the fourth quarter, particularly given the recent weakness in core capital goods orders.  Housing activity remains disappointing. The snapback in external trade was larger-than-expected but the rebound in inventories helped at least offset some of that.  The economy is very strong but there are areas of concern worth watching.

 

Consumer Confidence Revision: At 9:00 a.m. CT, the University of Michigan’s October report on consumer confidence will be revised.  Unlike the Conference Board report, it has pulled back recently, appearing to have changed momentum after peaking in March.  Regardless, it remains strong.

 

TRADING ACTIVITY

Yesterday – Tech-Led Stock Rally Showed Signs of Cracking After-Hours on Misses from Amazon, Google: U.S. stocks rallied back on Thursday as the Nasdaq led all gains and recovered 210 of Wednesday’s 329-point drop. The index’s 3.0% gain easily outpaced a 1.6% gain for the Dow and a 1.9% jump in the S&P 500. Within the S&P 500, tech companies closed as the second best sector with its 3.3% gain only slightly smaller than consumer discretionary’s 3.4% rally. Autos were the best performers with Ford shares up nearly 10% after sticking with its previous guidance for the full year. General Motors also moved up nearly 5%. Amazon rose more than 7% ahead of its post-market earnings release and led all retailers as the sector added 4.1%. However, shares sank more than 6% in after-hours trading following the company’s release of quarterly results that missed on the top and bottom lines. Treasury yields had tracked European yields lower early in the morning following ECB President Draghi’s press conference but recovered higher as U.S. stock notched a daily gain. Those gains were pared in the final hour of trading as tech index futures sank in the aftermath of earnings misses by Amazon and Alphabet (Google). The 2-year yield ended up 1.6 bps (+3.6 bps intraday) while the 10-year yield closed 1.3 bps higher (+4.0 bps intraday). In other markets, the Dollar jumped back close to its highest level since June 2017 and U.S. WTI oil recovered modestly for a second day but held near its lowest level in two months

 

Overnight – U.S. Tech Weakness Rattles Global Markets on Friday: Global equities have ignored yesterday’s U.S. gains, selling off again Friday to continue this month’s volatility that has dented corporate valuations around the globe. Despite a strong performance on Thursday, U.S. futures quickly turned lower in after-hours trading following revenue and guidance misses from Amazon and Alphabet. Asia stocks tracked that downtrend, and as the losses for U.S. equity futures have deepened throughout the session, sentiment has deteriorated further in Europe. Every major national index is down over 1%, helping to send the Stoxx 600 down 1.1% and to a new low since December 2016. Tech and tech-related companies in the region were the second worst performers ahead of energy. Oil prices, which have also been hurt in October’s global rout, fell again overnight and after two days of gains are back near their lowest levels since mid-August. Ahead of this morning’s GDP report, Nasdaq futures were down more than 2% and at their overnight low. After selling off following their earnings announcements yesterday, shares of Alphabet remained down near 5% before the opening bell while Amazon was off more than 8.5%. Treasurys again benefited from the uncertainty with the 2-year yield 4.0 bps lower at 2.808%, the lowest since September 21. The 10-year yield pulled back roughly 3.0 bps to 3.087%, its lowest since October 2 and a level that appears to be in a key technical range just below 3.10%.

 

NOTEWORTHY NEWS

Fed Vice Chair Clarida Sees More Hikes Ahead: Fed Vice Chair Clarida spoke in Washington on Thursday, saying “The U.S. economic expansion, now in its 10th year, is marked by strong growth in the gross domestic product (GDP) and a job market that has been surprising on the upside for nearly two years.” His support for a September hike was based on the fact that the economy is “growing briskly” and both halves of the Fed’s mandate are near their Fed-designated targets. But “Even after our most recent policy decision to raise the range for the federal funds rate by 1/4 percentage point, monetary policy remains accommodative, and I believe some further gradual adjustment in the policy rate range will likely be appropriate. That said, at this stage in the business cycle, I believe it will be especially important to monitor a wide range of data to continually assess and calibrate the level of the policy rate that is consistent with meeting our objectives on a sustained basis.”