Q3 advance GDP at 8:30 was headline better than expected; the estimate was for 3.0%, as reported 3.5%. The report is the first of three and will likely be revised next month when the preliminary report is released, the advance report misses some of the latest Q3 data that isn’t included in this report; the direction of the revision is not in our wheel house yet. The increase added to 4.6% in Q2 is the largest back to back GDP readings since Q3 and Q4 in 2003. Household purchases fell but increased government spending and a lower trade deficit offset. Government spending climbed at a 4.6% pace, the most since the second quarter of 2009. The pickup reflected a rebound in defense outlays. Consumer spending in Q3 at 1.8% was down from 2.5% in Q2, 70% of the economy is consumer spending and accounted for 1.2% of the 3.5% growth reported. Inventories grew at a slower pace, subtracting almost 0.6% points from growth. Excluding stockpiles, so-called final sales, climbed at a 4.2% pace last quarter, the most since 2010. The trade gap and inventories are two of the most volatile components in GDP calculations, and can show significant revisions in subsequent reports.
Weekly jobless claims increased 3K to 287K, estimated were for a decline of 3K; close enough to call the claims in line with estimates. The 4 wk average fell to 281K from 281,259, the lowest 4 wk average since May 2000. Job growth continues but there remains a huge gap between good decent paying jobs and most of the new jobs coming on line. The Fed is outwardly worried about the underutilization in the labor force; recent employment statistics confirm most of new jobs are at the low end of the pay scale.
At 9:00 the 10 yr note traded at 2.29% -3 bps, 30 yr MBS price +13 bps from yesterday’s close but just 2 bps from 9:30 yesterday. Yesterday prices fell off in the afternoon after the FOMC policy statement. At 9:30 the DJIA opened +47, NASDAQ -16, S&P -5; 109 yr 2.30% -2 bps, 30 yr MBS price +9 bps from yesterday’s close and -2 bps from 9:30 yesterday.
Not so good news out of Europe; six countries in the EU reported consumer prices declined. Deflation in the EU is getting worse according the data. Benchmark German 10-year yields fell four basis points, or 0.04 percentage point, to 0.86% today. Overall German inflation, calculated using a harmonized European Union method, declined 0.1% on the month, according to the median forecast in a Bloomberg News survey of economists.
The Fed ended QE3 yesterday; it was widely expected and with only $15B a month left on the monthly purchases from $85B a month when the QE began it isn’t a huge deal but is getting ink is secular media. In case you missed it yesterday, here is a synopsis of the policy statement:
- Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate
- Indicators suggests that underutilization of labor resources is gradually diminishing.
- Household spending is rising moderately and business fixed investment is advancing
- Recovery in the housing sector remains slow
- With appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate
- The Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year
- A substantial improvement in the outlook for the labor market since the inception of its current asset purchase program
- Continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment
- The Committee decided to conclude its asset purchase program this month
- The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program
A slightly better start this morning but not much and the stock market is likely to improve through the day n the better GDP. The fly in the pudding in the GDP data, the decline in consumer spending from Q2. Technically we are stepping on eggshells now; the 10 is barely holding its support at 2.30%, yesterday on the reaction to the FOMC the 10 jumped to 2.36% (40 day average) but closed at 2.32%. The 14 day RSI at neutral 50 still holding. The rate markets hanging on but after the beatdown in rates two weeks ago is having a lasting effect that there was no follow-through in the ensuing sessions, since the capitulation the 10 yield immediately climbed from the intraday low at 1.85% to the intraday high yesterday at 2.36%. The way rates easily bounced higher is somewhat of a concern now. Volatility!
PRICES @ 10:00 AM
10 yr note: +10/32 (31 bp) 2.28% -4 bp
5 yr note: +5/32 (15 bp) 1.57% -3 bp
2 Yr note: unch 0.48% unch
30 yr bond: +25/32 (78 bp) 3.01% -5 bp
Libor Rates: 1 mo 0.153%; 3 mo 0.232%; 6 mo 0.323%; 1 yr 0.541%
30 yr FNMA 3.5 Nov: @9:30 103.41 +9 bp (-2 bp from 9:30 yesterday)
15 yr FNMA 3.0 Nov: @9:30 103.68 unch (-17 bp from 9:30 yesterday)
30 yr GNMA 3.5 Nov: @9:30 104.46 +8 bp (+4 bp from 9:30 yesterday)
Dollar/Yen: 109.02 +0.13 yen
Dollar/Euro: $1.2604 -$0.0028
Gold: $1205.80 -$19.10
Crude Oil: $81.60 -$0.60
DJIA: 17,022.63 +48.32
NASDAQ: 4524.96 -24.27
S&P 500: 1975.73 -6.57