GDP, Confidence, Japan, Eurozone, Draghi and more…

Q3 GDP was revised to a 3.2% gain from the first print of 2.9%. That was better than the estimate of 3%. Nominal GDP beat the forecast by one tenth as the price deflator was revised down by one tenth. Consumer spending was revised sharply higher, seeing a gain of 2.8% from the first print of 2.1% and vs the estimate of up 2.3%. Spending on both goods and services were revised up. Durable goods spending improved in particular for auto’s/parts and recreation. A rise in healthcare spending and housing/utilities (higher rent) drove services spending. With investment, commercial and residential real estate was revised up but capital spending on equipment and intellectual property was revised lower. Trade was little changed and government spending was moved lower. Inventories were revised to less of a gain. Real final sales were 2.7% vs 2.3% initially and final sales to domestic purchases moved to 1.7% from 1.4%. Also of note, corporate profits (with adjustments) grew by 2.8% y/o/y after 5 quarters in a row of declines.

Bottom line, while old news, the revision provides us with the baseline from which Q4 activity began. On a 4 quarter run rate, GDP growth is now averaging 1.6% and 1.8% in the 3 quarters year to date. If we take as gospel the 3.6% Q4 GDP forecast from the Atlanta Fed and if it comes true, full year 2016 growth would average 2.25%. This is the same modest growth seen in this recovery but thankfully a pick up from the 1.5% pace seen from Q3 2015 thru Q2 2016. I’ll say again, the economic and market question for 2017 is how the benefits of Trump tax and regulatory policy (again, assuming no harmful trade policies) will offset the impact from higher interest rates. I believe we will have to deal first with the latter before we derive the benefits of the former.

After the upside in the November UoM confidence figure, the Conference Board’s index spiked to 107.1 from a revised 100.8 in October. That was well above the estimate of 101.5 and is at the best level since July 2007. The UoM said the election optimism was its main factor (see below) for improvement but today’s release not so much, “And while the majority of consumers were surveyed before the presidential election, it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome.” The cutoff date was November 15^th. Both the present situation and expectations components improved. Those that said jobs were Plentiful rose 1.6 pts but only after falling by 2.3 pts last month. Those that said jobs were Hard To Get were unchanged but holding at the lowest level since January ’08. There was little change in the expectations for more employment. Income expectations were also little changed. With business conditions, those seeing them as being Good right now improved but the 6 month outlook fell.

With respect to spending intentions, those that plan to buy a car fell .9 pts, giving back all of last months gains. Those that plan on buying a home rose 1 pt likely in response to the rise in rates and the raised urgency in terms of timing. Plans to buy a major appliance, such as a fridge, rose to the best since January. One year inflation expectations fell one tenth to 4.7% which is about in line with the one year average.

Bottom line, it was encouraging to see the headline jump in confidence but the internal components were more mixed. As most respondents’ answered before the election, we can also call this measure somewhat old news compared to the UoM index which captured most of the post election answers. As confidence numbers are only coincident in nature and rarely give good leads into future consumer behavior, the market never really responds much to them.

The Japanese labor market keeps getting tighter as the jobs to applicant ratio in October rose to 1.40 from 1.38. That is above the estimate of 1.39 and it’s at a level last seen in August 1991. The unemployment rate held steady at 3% as forecasted and matches the lowest level since 1995. Where are the wage increases? They are still stubbornly anemic. As for consumer spending, they were better than estimated in October as retail sales grew by 2.5% m/o/m vs the consensus of up 1.1%. They still fell by .1% y/o/y which is lower for the 11^th month in the past 12. Overall household spending shrunk by .4% y/o/y, not as bad as the 1% expected decline. That is down for 13 out of the past 14 months y/o/y. Bottom line, it’s getting tougher to find a job in Japan but wage growth is slow and consumer spending remains punk. In contrast to the desires of the BoJ, thankfully consumer price inflation is modest under this economic reality. I don’t subscribe to the theory that higher inflation leads to quicker growth. The market response was mixed as the Nikkei fell modestly, JGB’s were little changed and while the yen is now weaker, it was little changed during the Japanese trading hours.

Economic confidence in the euro area in November was little changed at 106.5 vs 106.4 in October and slightly below the estimate of 106.8. It does stand though at the best level since December. There was “mild deterioration in industry confidence and stable readings in services, which offset more upbeat assessments of construction and retail trade managers, as well as consumers.” Among the larger countries, France and Spain saw the best gains while Germany and Italy backed off. Interestingly, the UK got back all of what it lost post referendum vote. The disappointment within the data was the bi-annual investment survey which showed that “real investment in the manufacturing industry is expected to increase by 1% in the euro area in 2016. This is a significant downward revision from the 6% growth managers had expected in the previous survey” six months ago. The 2017 forecast is for 2% growth. It’s another example that cheap money and corporate bond QE doesn’t equate to stronger corporate investment, especially when there is already excess capacity in a variety of industries.

You can tell that Mario Draghi is desperately seeking help from European governments to drive growth because he is realizing the limits and dangers of his own efforts. Speaking yesterday to the European Parliament committee he said an extended period of ultra low rates are “fertile terrain for financial stability risks” at the same time he again called out governments for more structural reforms. We’ll see what he announces next week at the next ECB meeting with regards to the March expiration of QE. I’m sure he continues full speed ahead but 2017 will see at some point a tapering of their QE. We all debate and discuss the existence and/or the end of the global bond bubble but Europe’s bond bubble I believe should be unquestioned. What’s going to happen to European bond yields when QE ends and when the -.40% deposit rate becomes less negative and god forbid gets back to zero? Pain.

Also in the UK, mortgage approvals in October also gained back what it lost post Brexit vote. The pound is higher in response.

Also of note in Europe, French consumer spending in October grew by .9% m/o/m which was 3 times more than expected and the y/o/y gain of 1.5% was the best since May. Just imagine for a moment if Francois Fillon is elected the next President of France next April. This is a guy who claims to be the next coming of Margaret Thatcher in terms of his economic policies. France’s sclerotic social welfare state would get turned upside down. He wants to get rid of 500k public sector jobs via attrition. He wants to end the 35 hour work week and get rid of the wealth tax. He referred to the current presidential term of Hollande as “pathetic.” The CAC is up .5%.