USA
• Rebound in Q3 GDP growth
• November FOMC: Fed rate hike approaching
• October employment report supporting a rate hike
US GDP growth beat expectations in Q3. Real GDP expanded by 2.9 % (q/q, annualized rate) after sluggish growth during the first half of the year (1.1 % on average). Household consumption expenditure grew by 2.1 %; weaker after strong Q2 growth (4.3 %). Gross private domestic investment turned positive after two negative quarters mostly amid a rise in inventories. Fixed investment continued to contract slightly (-0.6 %) amid a decline in residential investment (-6.2 %) and a small rise in non-residential investment (1.2 %). Net export contributed positive to GDP growth (exports +10 %, imports +2.3 %). Basically, the Q3 GDP rebound was expected (Bloomberg consensus forecast: 2.6 %).
The ISM manufacturing survey – one of the most prominent US leading indicators – recovered further in October (51.9) and now indicates expansion in the manufacturing sector for the second consecutive quarter. The index had fallen sharply last year mainly due to contraction in the energy sector and has been struggling to recovery in recent months.
The federal open market committee (FOMC) of the US central bank Fed maintained the target range of the federal funds rate unchanged at 0.25 to 0.50 % in November. Minor changes in the statement indicate that an hike of the fed funds rate is near and likely for the December FOMC meeting.
The statement says that “inflation has increased somewhat since earlier this year but is still below the committee’s 2 % longer-run objective,…”, while previously it stated that “inflation has continued to run below the committee’s 2 % longer-run objective,…”. Inflation is now expected to rise to 2 % over the medium term, while in September the FOMC expected inflation to remain low in the near term. The FOMC judges that the case for an increase in the federal funds rate “continued to strengthen” (previously: “strengthened”) but decided, for the time being, to wait for “some” (inserted!) further evidence. These minor changes in the statement seem to prepare for a rate hike in the next FOMC meeting. Market implied odds have recently increased to 78 % for a hike in December.
The October employment report released last Friday was also supportive for a rate hike in December. Non-farm payrolls increased by 161.000 in October (slightly below Bloomberg consensus expectations of 173.000) but the job growth for September was revised upwardly from 156.000 to 191.000. The unemployment rate fell again from 5 % to 4.9 %. Finally, wage growth is gathering pace: Average hourly earnings increased by 2.8 % (y/y) and stronger than expected (2.6 %) pointing to rising wage pressure on inflation.
EUROZONE
• Growth resilient in Q3
• GDP growth accelerated in Austria
• Inflation and Euro Area yields rising moderately
The Eurozone business cycle remained more resilient to external effects (Brexit) than commonly suggested by analysts a few months ago. In Q3, real GDP grew by 0.3 % (q/q, flash estimate) following growth of 0.5 % (Q1) and 0.3 % (Q2) in the first half of the year. At country level, Spain again posted strong GDP growth of 0.7 % in Q3, French GDP increased by 0.2 % and Belgium’s GDP grew also by 0.2 %.
In Austria, GDP growth accelerated in the third quarter (0.3 % q/q, seasonally and weekday adjusted) after weak growth in Q2 (0.1 %). The Austrian Economic Institute (Wifo) reports trend GDP growth of 0.4 % (q/q) in Q3 after 0.3 % in the previous quarter. Domestic demand is driving GDP growth. Household consumption expanded by 0.4 % (after 0.3 % in Q2) and, in particular, gross fixed capital formation gained speed during the last three quarters (Q1 and Q2: 1.2 %, Q3: 0.8 % q/q): On the other side, net export contributes negative to GDP growth (exports: +0.4 %, imports: +0.7 %). The solid Q3 outcome gradually raises our own growth expectation for the entire year to 1.5 % (from 1.4 % previously).
According to the flash estimate, Eurozone consumer price inflation increased 0.5 % in October from 0.4 % (y/y) in the previous month. The increase was expected due to base effects (after previous year’s energy price decline) and a further increase to around 1.0 % until year-end is anticipated. It will be interesting to see whether nominal yields keep rising in line with increasing inflation what would indicate that market participants adapt inflation expectations to realized inflation. Recently, market inflation expectations (as measured by 5-year forward inflation swaps) have improved to 1.48 % from the trough at 1.26 % in early September (Figure 2).
CEE
• PMIs keep indicating support for growth
Business sentiment in Central and Eastern Europe remained supportive in October (Figure 3). The purchase manager index (PMI) for the Czech manufacturing sector rose from 52.0 to 53.3 indicating solid expansion in manufacturing activity. Also, the Hungarian manufacturing PMI remained at a comfortable expansion level (57). Both series now have upward trends since the first half of the year. Poland’ manufacturing PMI has slightly softened recently (50.2 after 52.2). Finally, the survey for Russia surprised positively in October rising comfortably into expansion territory (52.4 after 51.1). This rise would confirm recent improvement in high-frequency economic indicators. The Russian economy is about to leave the recession.