Monday 23 April 2018

Daily Market Update: Headline GDP growth slows in the US in Q3 but underlying performance looks solid


Data out yesterday show growth in the US economy moderated in the third quarter to an annualised pace of 1.5%, down from 3.9% in Q2.

On the face of it, such a marked cooling of GDP growth might be a cause of concern. However, we aren’t troubled by the slowdown in the headline growth rate for a couple of reasons. First, the number was in line with analyst expectations (for 1.6% growth) and so wasn’t the source of any major surprise. It has been clear from recent monthly data that the third quarter GDP estimate was likely to feature a sizeable negative contribution from inventories, and this did indeed materialise yesterday: a lower rate of stockbuilding by firms in Q3 relative to Q2 meant that the change in inventories knocked 1.4% percentage points off the headline growth rate in Q3. And so, secondly, looking at measures of final domestic demand (i.e. stripping out inventories, and trade which was broadly neutral for Q3 growth) reveals a stronger underlying growth dynamic.

In fact, real final sales to private domestic purchasers (a good gauge of private domestic demand) rose by 3.2% annualised in Q3, and are up by a similar 3.3% over the year to Q3. So despite the apparent softness in the headline growth rate, we think the detail in yesterday’s report shows a more solid‐ looking US economy. And another better‐than‐expected reading in the weekly jobless claims report ‐ also out yesterday ‐ has helped to reinforce the view that US economic conditions are continuing to improve. The 4‐week average of initial claims made a new cycle low below 260k (levels last seen in 1973) in the process offering further important encouragement on the health of the US jobs market.

Elsewhere, there was also some encouraging news regarding the euro zone economy yesterday. This came in the form of the European Commission’s monthly Economic Sentiment Indicator (ESI) which beat market expectations for the third month in a row, with the October reading reaching its highest level since June 2011. The ESI is a reasonably good indicator of the euro zone business cycle, and the ongoing improvementsuggests that the euro zone economy is holding up reasonably well (by euro zone standards at least) early in the fourth quarter, despite concerns within the ECB and elsewhere about potential downside risks to the outlook. Also of note in yesterday’s European newsflow was an upside surprise in German inflation which accelerated from ‐0.2% to +0.2%y/y on the HICP measure (analysts had expected a 0% print). More broadly, inflation in the euro zone is set to drift higher in the months ahead as year‐earlier large declines in energy costs fall out of the annual comparisons.

On the fx market, the dollar has given back some of its post‐FOMC gains. Having dropped from roughly $1.11 to $1.09 on Wednesday, Eur/USD is back at around $1.10 this morning, with the better tone to the ESI release helping the single currency to retrace some of its prior losses. But there is certainly an element of a weaker dollar at play here as the greenback is also losing ground against the pound, with GBP/USD opening at $1.53330 this morning – close to where it was trading prior to Wednesday’s hawkish surprise from the Fed.

Looking to the day ahead, preliminary HICP inflation numbers are published for the Eurozone. Expectations are for the headline rate to be 0.0% y/y in October after ‐0.1% in September. The core (ex‐ energy & food) measure is expected to remain unchanged at 0.9% y/y. Note however that there may be some upside risk to today’s release as there was a positive surprise in yesterday’s German numbers. Unemployment for the Eurozone will also be announced for September and is expected to remain unchanged from August at 11.0%.

In the US, headline inflation on the PCE deflator measure is expected to have decelerated in September to 0.2% y/y, down from 0.3%. However, the core (ex‐food & energy) measure is expected to firm to 1.4% y/y following 1.3% in August. A key channel through which the Federal Reserve expects inflation to increase is increased labour market cost pressures, so today’s employment cost index will garner some attention and is expected to accelerate to 0.6% q/q for Q3 after 0.2% in Q2. The final estimate of the University of Michigan consumer sentiment survey will be released for October after the initial estimate of 92.1 earlier in the month and expectations are for the index to print at 92.5. The universities’ medium term inflation expectations survey is also announced after a flash estimate of 2.6%.

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