The US economy grew by 1.9% annualized in Q4, below the estimate of 2.2% and brings the 4 quarter average for 2016 to 1.9% which is in line with the 1.9% gain we saw in 2015. Personal spending was up by 2.5% which was in line with the consensus and mostly driven by a gain in spending on durable goods. The investment side saw improvement in capital investment as spending on equipment and intellectual property both rebounded q/o/q. Residential real estate jumped by 10.2% after two quarters in a row of declines. Trade was the big drag as it took 170 bps off GDP as exports fell by 4.3% while imports jumped by 8.3%. Government spending added two tenths to GDP. Inventories added 100 bps. Looking at real final sales which takes out inventories saw a modest .9% gain, the weakest since Q1 2014. Digging deeper saw final sales to domestic purchasers rise by 2.5% vs 2.1% in Q3 and 2.4% in Q2. The inflation stats were in line with the price deflator up by 2.1%, thus putting nominal GDP up 4%. Disappointing was the 3.8% wage and salary gain annualized, down from 5.5% in Q3 and 6.7% in Q2.
Bottom line, the year ends on a mediocre fashion but policy is about to change. Positively on the fiscal side and a drag on the monetary side (so we can consider Q4 data old news but it does set the stage and baseline for 2017). Who will win out? The positive within the data was the capital investment data which will flow into my next comment on December durable goods.
Core capital goods orders ex defense and aircraft rose .8% m/o/m in December and November was revised up by 6 tenths. The estimate was for up just .2%. It finally brings the y/o/y change into positive territory as it closed the year up 1.2%. Meager but better than a decline. On the shipments side, which gets plugged into GDP, was up by 1%, twice the estimate and November was also revised up. This could help the next revision to Q4 GDP. As inventories were flat, the inventory to sales ratio fell to 1.61, the lowest since 2015 from 1.64 and sets up well for a build.
Bottom line, we’ve seen many confidence diffusion indices all pointing to ebullience on Trumponomics. What needs to come has to be actual improvements in business activity and maybe the capital investment increase in December is the beginning of something. If tax reform will soon include full expensing of capital investment in the 1st yr (essentially getting rid of straight line depreciation), expect a further improvement in capital spending, the key missing piece to the lame recovery seen since the last recession.
10 year yields are 2.50% now in and were 2.52% this morning prior to the data.
We got some more inflation data overseas today. In the country where the government is desperately in search of inflation to the dismay of its people (with wage growth weak), Japanese December CPI ex food and energy was zero y/o/y but that was .1% more than forecasted. The headline gain of .3% y/o/y was driven by food. The forward looking Tokyo CPI for January also saw no change y/o/y after falling by .2% in December. Kuroda’s problem was his completely unrealistic desire for 2% inflation which was literally a number picked out of thin air. They may get there but it will be under a South America inflation story. Also of note in Japan was the BoJ ‘yield curve control’ was activated as they increased by 10% their purchases of JGB’s with maturities between 5 and 10 yrs. It had a miniscule impact though as the 10 yr yield went from .091% to .084%. As the BoJ doesn’t care where yields go past 10 yrs, yields further out were unchanged. The yen weakened in response.
Adding to the Germany inflation story where we saw jumps in both CPI and PPI for December, import prices spiked 1.9% m/o/m and 3.5% y/o/y, both well above expectations of 1.3% and 2.7% respectively. That y/o/y gain is the most in 5 years and no, it was not all energy. Import prices ex petroleum was higher by 1.7% y/o/y, the biggest gain since July 2015. German yields however are little changed on the day and the euro is flat but this story I continue to believe will only get more heated this year causing major butting of the heads with the ECB. German yields are still negative out to 7 years with the 2 yr in particular yielding -.66%. This is a train wreck waiting to happen when the ECB decides to get out of negative rate territory.
Italian economic confidence improved in January with its index up by 2.3 pts, a 6 month high but remains within the tight range seen in 2016. The manufacturing component did rise to the best since October 2015. The loss of the Renzi government hasn’t seemed to have much of an impact on psychology. After all, more than 60 governments in 70 years is just par for the course.
The ECB released lending data and said loans to households were up by 2% in December y/o/y, a slight improvement from the 1.9% growth seen in November. Loans to companies grew by 2.3%, up from 2.1% in the month prior. M3 money supply growth was up by 5% y/o/y vs the estimate of up 4.9%. The economic stats in the region have continued to improve. While the euro STOXX bank index is down about 1% today, it did close yesterday at the highest level in a yr as yield curves have steepened. Draghi speaks twice next week.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.