US GDP Upgrade Adds To Fed’s Case

Daily Analysis - 30/11/2016

Stronger Domestic Growth Paves the Way Forward for a December Rate Hike


Driven by better consumption and exports, the second reading of US gross domestic product rose above forecasts reaching the fastest pace of expansion in 2-years.  While the US dollar fell after the announcement, the currency is on the rebound as markets cue up for the OPEC decision due later in the session.

US Economic Activity Accelerates

With market participants awaiting the results of the upcoming nonfarm payroll figure on Friday for signs of sustained growth in the economy, the second reading of third quarter US GDP blew away estimates, printing at 3.20% versus the 2.90% reported a month ago.  Personal consumption expenditures were listed off as one of the primary factors behind the blistering pace of growth while more spending on durable goods also contributed to the upturn.  Additionally, exports surprisingly rose during the latest quarter, climbing 10.10% over the second quarter.  Adding to the optimism was the latest consumer confidence figures from the Conference Board which rose to the highest point since July of 2007.  In the meantime, stocks are continuing the last sessions climb, potentially gearing up for another Dow futures test of record highs.


Dairy and Housing Remain Source of RBNZ Anxiety

In comments released during the Asian session, Reserve Bank of New Zealand Governor Graeme Wheeler underscored the risks facing the economy as policymakers work to tackle the housing market.  Stressing that the Central Bank is unlikely to accommodate interest rates further in light of creating a potential property bubble, officials are working harder to add restrictions to avoid a bursting bubble.  Wheeler also highlighted the potential impact of growing economic protectionism globally as a factor that might hurt the domestic dairy industry.  However, he did expect the dairy sector to be profitable following the spectacular rebound in dairy prices over the last few months despite the growing indebtedness of local farmers.  With the prospect of another rate cut severely dimmed by Wheeler’s remarks, the New Zealand dollar continues to climb versus its US counterpart, reaching the highest point since the US election.


ECB Expects Inflation to Reach Target in 2018-2019

Comments from European Central Bank President Mario Draghi to Spanish newspaper El Pais indicated that the Central Banker believes that inflation will return towards the 2.00% targeted by 2018-2019.  Although the region has been unable to reach the desired inflation levels in over 3 years, there are positive signs that consumer prices are gradually improving.  Preliminary CPI figures from France suggest that upside pressure is gaining, with November’s consumer inflation rising at a 0.50% annualized pace compared to 0.40% reported for October.  Spain has also seen comparable figures also record gains, with preliminary headline inflation reading at 0.70%, matching the prior month’s figure and marking the best reading since 2013.  Nevertheless, Draghi has mentioned that political risk factors remain, potentially impacting the economic recovery.  After climbing on Tuesday, the EURUSD pair is back on the retreat as the US dollar selloff reverses.


German Retail Sales Hit Multi-Year High

Although the pace of German GDP expansion has tapered notably, falling to 0.20% during the third quarter and matching the results of a year prior, one of the primary drivers of the gains has been domestic consumption.  With the export market faltering, government expenditures combined with stronger household spending have been largely able to offset the external turbulence.  The latest retail figures confirm this result, with retail sales climbing 2.40% during the month of October.  Besides marking the fastest positive result since August, it also marks the fastest pace of growth since 2011.  Despite still being negative on an annualized basis, the latest pickup in consumption combined with inflation at a 2-year high is fueling optimism that conditions are beginning to improve for the economy.  In the meantime, the DAX 30 is on the rise, mirroring gains in global equity futures.


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