The Global Markets Weekly – 10/30/16

Posted October 30, 2016 by rvillareal

More than a Soybean Surprise[private]

The advance report on U.S. third quarter GDP revealed a welcome uptick to 2.9% annualized, from an average 1% pace recorded over the prior three quarters. As with most reports, the result was not unequivocally strong to all observers, but DE believes it was certainly strong enough to keep the FOMC locked in for a December hike. The major quibbles were a slowdown in consumer spending to 2.1% annualized, but after 4.3% in Q2, and a quirky jump in soybean exports that added nearly one percentage point to the headline. The net soybean impact was smaller than that rough estimate suggests as a portion came out of inventories, as the BEA noted in its release.

Still, timelier reads on the economy suggest the bounce will be sustained, adding to momentum abroad. DE believes a higher pace of U.S. growth (near-3% in the fourth quarter) will be bolstered by consumer spending, with a similar pace in 2017 and 2018, on an expected turn in fiscal policy from restrictive to a modest tailwind. That is an assumption based on growing consensus across global policymakers that monetary policy is, if not running out of ammunition, at least less effective at creating the sort of productivity and structural improvements that will be more important in generating lasting growth than could easy financial conditions or wealth effects.

In a cyclical sense, headwinds to energy investment appear to be ebbing, and other factors suggest a second wind for the U.S. and global economies heading into 2017. Rising wages are a clear positive for workers, and fundamentals surrounding the consumer are improving. Abroad, we believe above-par growth is in the cards for the Eurozone, where quarter-on-quarter volatility may mask a y/y rate at 1.6%, actually above potential. That will come on the heels of a better-than-expected result in the U.K., where DE believes the economy will avoid Brexit-induced recession, and exceed consensus thinking.

With that in mind, attention this week turns to key central bank policy meetings, the headliner being an FOMC meeting without a press conference. The main goal will be to keep expectations of a December move intact, not hard with markets assessing that outcome at roughly 70%. An off-meeting surprise could be justified in a strictly data-dependent world, particularly after a toss-up September decision, but surprising markets just one week ahead of the U.S. election is a card few are prepared to play. DE expects the Bank of England to hold steady along with the Bank of Japan, both bodies eying domestic fiscal measures and inflation developments.

• S.: The highlights will be the FOMC meeting and statement (Wed), along with the ISM Surveys (Tue/Thu), and the October employment report (Fri). PCE data (Mon) will be watched closely, as the Fed’s preferred inflation metric. Fed speakers appear at week’s end, with Lockhart, Kashkari, and importantly Fischer (all Fri).
• Eurozone: V ery clearly the focus of the week will be Monday when Flash HICP data (for October) appears alongside the flash Q3 GDP A small and further rise is anticipated for the former. Perhaps more high-profile will be the Q3 GDP data. Such data would appear to have suggested a slowing in the economy occurred in Q3, but this would be a misrepresentation of the economic backdrop – and outlook. Indeed, the softer GDP reading would be nothing more than indicative of more quarter-to-quarter volatility, with the Y/Y rate staying at 1.6%, actually above par and above the current potential growth rate.
• UK: There are still clear differences as to what the outcome of BoE MPC verdict on Thursday will be. DE has very much sided with the market view that the BoE will be on hold this time around, having repeatedly suggested that while more stimulus measures are possible, they are not probable, especially given growing political opposition, and, if they do occur, may be deferred until into 2017. Indeed, the question is whether updated Inflation Report sees the existing easing bias tempered if not abandoned!
• Japan: The BOJ policy meeting (Tu) is unlikely to see major changes so soon after the initial foray into QQE with yield curve control, but what hasn’t changed is a soft inflation outlook, and meager growth rates near or below potential, on average.
• China: Manufacturing PMIs (Mo) may hold in mild expansion territory, no surprise as policymakers attempt to manage a rebalancing toward services.
• Other central banks: Policymakers in the Czech Republic (Th) meet. Policy rates have been at zero for several years, and the currency cap versus the euro looks to be in place through mid-2017.

gmw_1028[/private]