As much as yesterday’s German GDP announcement was altogether disappointing, the US’s growth numbers were impressive. With Germany growing at 0.1% QOQ and the US economy expanding at a rate of 3.9% annualised, it means that the US economy is growing at ten times the rate that Germany is. We talked yesterday about the divergence that is possible and probable between the Federal Reserve and the European Central Bank on a policy standpoint through 2015.
This data only exacerbates that divergence and has led a few commentators to forecast that the Federal Reserve will amend its policy language at its December meeting to remove the “considerable period” language around rates remaining low. Should this happen, then we can expect to see the market once again bring in its rate expectations to around the end of Q2 or the beginning of Q3, and further drive the USD onwards.
The 3.9% annualised growth in Q2 combined with the 4.6% increase in Q2 means that the six months between March and September was the fastest growing six month period in ten years. This expansion was driven predominantly by household and corporate spending. Consumer spending, which makes up around 70% of the US economy, grew by 2.2% on the quarter and given the spread over both durable and non-durable goods, means that spending is broad based and that the momentum should continue into the important festive season. Of course, the majority of this seems to be as a result of the falls in gasoline prices and the increased employment rate that have characterised the past three months of moves in spending dynamics.
Corporate investment rose by 10.7% on an annualised rate on the quarter, revised from 7.2% at the first iteration. There is one fear that was evident within these numbers, however, with the trade gap tightening as exports slipped and imports moved higher. Of course, these are obvious functions of news from the Eurozone and China mixed with the vast outperformance of the US dollar since the summer. Everything is still pointing to a decent US GDP announcement for Q4, however, and we are pencilling in growth of between 3-3.5%.
In a busy data day that is set to see liquidity drift away as the market prepares for the Thanksgiving holiday on Thursday, UK GDP and US inflation measures are the main movers of the day. At the first reading of UK GDP for Q3, it was clear that the level of exuberance in the UK economy had slackened in the past four to five months. Of course, 0.7% growth is not in any way shoddy but changes to the current landscape need to be seen for a move higher in the coming quarters.
Headwinds from the current slowing of output in Europe and China are obvious dangers to the UK’s growth picture, and with real wages remaining at negative rates at the moment, there are concerns about how much farther domestic demand levels can be pushed. Trade figures and wage settlements are now the barometers for the UK economy and any policy changes that the Monetary Policy Committee will be weighing more so than growth.
For today’s second reading, I am expecting growth to be confirmed at a rate of 0.7% in Q3 with a decent impact from consumption and investment. Unfortunately I am thinking that the export environment – poor demand and a strong pound – could easily disappoint but should not be enough to damage the overall YoY figure of 3.0%. The release is due at 09.30.
Overnight markets have seen both the AUD and NZD recover from their rather precipitous falls yesterday while yen has rallied following further comments from politicians in the country that the decline had been too far and too fast.
