U.S. 3Q GDP Rises 2.9% as Economic Growth Rebounds. U.S. economic growth picked up in the third quarter after an uninspiring first half of the year as a build in inventories and a jump in exports helped cushion softer household spending. The 2.9 percent annualized increase in gross domestic product, the value of all goods and services produced, was the biggest in two years and followed a 1.4 percent gain the prior quarter. Financial markets were relatively unmoved by the data.
The data is in sync with the views of Federal Reserve policy makers that the economy is making slow and steady progress and an interest rate rise at the December Federal Open Markets Committee Meeting (FOMC) is very much still points to 0.25% rise in interest rates (‘Fed Funds’ rate).
Financial Markets are confident that the ‘no change candidate’ Hilary Clinton will win the US Presidential Election on November 8th but markets will fluctuate with political developments and opinion polls.
The UK economy grew by a much better than expected 0.5 per cent in the third quarter, the first period that reflects how the economy has held up since the Brexit vote. Compared to the third quarter of 2015, growth was 2.3 per cent higher. The UK economy has held up far better than many were expecting following the Brexit referendum on June 23. The data supported UK equity markets and means further UK interest rates cuts are unlikely.Indeed with inflationary pressures building (due to Sterling weakness) the markets are predicting that the next move in UK interest rates in 2017 will be up.
The Euro hit an eight-month low versus the US Dollar at $1.0848 as a December US interest rate rise remains likely.
Sterling has remained weak against the dollar at GBP/USD 1.2200.
US stock indicies remain close to all time highs as the economy continues to grow and interest rates remain near historic lows.
Sterling’s latest bout of weakness helps support the UK FTSE 100 similarly within a few per cent of all time highs.
Bonds witnessed a sharp fall in prices /rise in yields. Why this sudden selloff? In part, we have a bit of an overhang of new issuance, triggered initially by Austria’s new 70yr bond as well as sales from Portugal and Germany on the following day. Moreover, there is a now some concern that while markets have been pricing no or negative inflation for years to come, we have signs that the global disinflationary pressures are easing. For example, we’ve seen massive rallies in certain commodity prices, especially metals. The world economy isn’t growing fast enough to sustain significant inflation, but given the expectations of “lower for longer,” even small inflation surprises can send bond investors running for cover.
Gold fairly subdued in a $1,250-$1,300 per ounce range. Weaker physical demand for gold for jewellery from China and India not helping although gold’s main driver is always speculative or ’safe haven’ flows. Oil price volatility similarly subdued around $50 per barrel.
Asset Management: The business of picking stocks and bonds for clients is getting smaller by the day. Seven top asset managers last week reported a total of $50 billion in third-quarter net redemptions, most of it from active to passive funds. The tally is further evidence that investors, frustrated with high fees and mediocre performance of actively managed funds, are increasingly casting them off for low-cost passive investments. In the 12 months ended Sept. 30, active funds had redemptions of $295 billion while passive took in $454 billion, according to data from Morningstar Inc. The shift from active to passive is an accelerating secular trend.
Corporate Bonds: This year has been the best year for corporate bond sales for more than a decade, with more than 2 Trillion of such debt sold so far this year as companies use record-low borrowing costs to refinance and fund dealmaking.
S&P 500: 2100
FTSE 100: 7000
Bonds – 10 Year Government Yields
EUR/USD 1.0950 (1 euro buys 1.0950 dollars)
GBP/USD 1.2200 (1 pound buys 1.2200 dollars)
OIL: Brent: 50.00 (dollars per barrel)
GOLD: 1275 (dollars per ounce)
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