
The US economy grew 2.9% q/o/q annualized in Q3, better than the estimate of 2.6% with an interesting mix. Personal spending, the biggest component as we know, grew just 2.1%, well below the estimate of up 2.6% and down from 4.3% growth in Q2. After three quarters in a row of declines, gross private investment grew by 3.1% in the quarter led by commercial building and spending on intellectual property. The offset were declines in residential spending and disappointingly, equipment spending fell for the 5th quarter in the past 6. Trade was the major delta in boosting GDP as exports jumped by 10% (huge boost in soybeans) that added a full 110 bps to GDP growth while imports were higher by 2.3%. Government spending was up slightly and a modest boost in inventories after the Q2 drawdown added 60 bps to GDP. With inflation, core PCE grew by 1.7% with the headline up by 1.4%.
Bottom line, the 4 quarter average growth run rate is now exactly at 1.5% and Q3 was saved by a big boost in exports and agricultural exports within that. Personal spending is at a 2.5% average run rate over the past 4 quarters while capital spending remains punk.
With respect to wages/salaries/benefits, the Q3 Employment Cost Index rose by .6% q/o/q as expected. Digging within, private sector wage and salaries rose by .5% q/o/q vs .6% gains in the two prior quarters of 2016. On a y/o/y basis they grew by 2.4% and is now averaging 2.3% over the past 4 quarters, decent but no hoped for acceleration yet. Benefits is where things are creeping up likely due to ever rising healthcare costs. Benefits grew by 2.3% y/o/y, the most since Q1 2015.
Irrespective of the GDP breakdown and after the in line wage and salary data, the 10 yr yield at 1.88% is where it was just prior to the releases on the heels of global sovereign bond weakness. The 2 yr note yield is at .88%, the highest since early June as the Fed gets ready to hike.
Since September I’ve been building the case against sovereign bonds for political, logistical and economic reasons. Looking at another rise in yields today, let’s look at just the inflation expectations in some major markets. The US 5 yr and 10 yr inflation breakevens are at the highest level since July 2015. The UK inflation breakevens are at the highest since April 2013. The euro 5 yr 5 yr inflation swap rate that Mario Draghi said he likes to look at is at the highest level since May. The Japanese 10 yr inflation breakeven is at the most since late June.
Inflation stats in Germany and Spain on a EU harmonized measurement both rose more than expected. French CPI was a touch below the forecast. In Japan, while the September inflation stats were a touch below estimates, the forward looking October CPI for Tokyo surprised to the upside where CPI ex food and energy rose .1% y/o/y vs the estimate of a drop of .1%.
Economic confidence in Europe saw an unexpected gain in October. The index rose to 106.3 from 104.9 where the estimate was for no change. It is the best level of the year and just below the level seen in December. Manufacturing, services, and construction led the gains. Consumer confidence was up a touch. Geographically it was led by Germany, Italy, and Spain. France saw a decline. The UK saw an increase but their components were mixed and seemed to be pound related. Manufacturing confidence grew by consumer confidence, construction and services all fell.