U.S. economy back in positive territory
The U.S. economy got to play “trick or treat” early and ahead of the Halloween festivities with several economic indicators. New home sales and consumer confidence clearly were tricks with numbers being very disappointing. But equity investors got a treat on Thursday as real GDP posted a stronger-than-expected 3.5 percent annualized gain for the quarter. The relatively strong number sent the “equities-are-in-correction” traders scurrying for cover—or rather short covering for the day. Nonetheless, the question remains—how strong is the recovery and is there reason to believe equities are a little ahead of where economic growth is really headed?
Recap of US Markets
STOCKS
Equities fell significantly this past week, with small caps and techs taking the biggest hits. Economic reports played the bigger role in moving stocks but company news also came into play. A drop in consumer confidence on Tuesday bumped equities down. At midweek, an unexpected drop in new home sales led to a sell-off of equities—especially for homebuilders and small caps. The big positive for the week was a rebound in stocks with a better-than-expected third quarter GDP gain. The 3.5 percent GDP number led to brief market euphoria. Also, traders holding short positions (many had downgraded their forecast for GDP) had to cover quickly, helping to boost prices.
But a sluggish personal income report and monthly dip in consumer sentiment reminded markets how weak the consumer sector is, resulting in the bears taking over again and stocks dropping despite a positive Chicago PMI at week end. Also, knocking down stocks were fears of a Citigroup bankruptcy after an analyst announced the possibility that Citigroup might be taking a $10 billion write down on taxable assets. Also, a boost in the dollar undercut the oil patch and other commodity producers. Finally, the end of October is the end of the fiscal year for many mutual funds, leading to end of quarter portfolio cleaning. But the bottom line is that stocks were in a broad-based retreat at close of the week with traders wondering whether the downtrend will pick up on Monday where it left of on Friday.
Equities were down this past week. The Dow was down 2.6 percent; the S&P 500, down 4.0 percent; the Nasdaq, down 5.1 percent; and the Russell 2000, down 6.3 percent.
For October, major indexes are mixed as follows: the Dow, unchanged (up fractionally but flat after rounding); the S&P 500, down 2.0 percent; the Nasdaq, down 3.6 percent; and the Russell 2000, down 6.9 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 10.7 percent; the S&P 500, up 14.7 percent; the Nasdaq, up 29.7 percent; and the Russell 2000, up 12.7 percent.
BONDS
The Treasury Department probably was the biggest beneficiary of this past week’s net negative economic data. Just when you thought ballooning supply would boost yields, the economy shows signs of sputtering and investors head to the safety of U.S. government debt.
Even though the Treasury Department sold $125 billion of T-notes in four separate auctions this week, yields were down for the week. At the auctions, demand was strong except for Thursday’s sale of 7-year notes which was the last of the week’s auctions.
During the week, Treasury yields generally followed the economic data and the stock market. The largest decline in rates was on Tuesday with the sharp decline in consumer confidence. Weak new home sales helped eased yields at mid-week. Rates were up on Thursday’s relatively strong GDP number. Yields fell at week end on flight to safety as equities plunged on Friday. Basically, rates were down net for the week on the view that the economy is not as strong as believed and on investor nervousness about how to protect capital.
For this past week Treasury rates were down as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 12 basis points; the 5-year note, down 13 basis points; the 7-year note, down 12 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 6 basis points.
OIL PRICES
Spot prices for crude oil dipped net somewhat under $3 per barrel, largely on weak economic data and higher inventories. The biggest moves downward during the past week were on an unexpected drop in new home sales and higher oil inventories on Wednesday and on sluggish personal income and consumer sentiment on Friday. A boost in the dollar also weighed on oil prices at week end. However, unexpectedly strong third quarter GDP did interrupt the drop in crude as spot West Texas Intermediate jumped over $2 per barrel on Thursday. But net for the week, mostly negative economic news pulled down prices for crude.
Net for the week, spot prices for West Texas Intermediate fell $2.78 per barrel to settle at $77.
Looking ahead, we are going to have to expand what we track in the oil markets. This past week, Saudi Arabia announced that starting in January 2010, it would stop using West Texas Intermediate as its benchmark for pricing its oil. This is a huge concern for the NYMEX as the oil futures contract is the main contract traded on NYMEX.
Both Saudi Arabia and many of its refinery customers have become unhappy with the WTI benchmark since it began to diverge from global oil prices this year.
The new benchmark to be used by Saudi Arabia will be the Argus Sour Crude Index which will be based on a physical market basket of U.S. Gulf coast crudes. This index is being developed by Argus, a London-based oil pricing company. These crudes have been growing in importance in terms of both production and trading activity. However, the WTI benchmark is likely to remain quite important as the delivery point for much refining in the U.S.
The Economy
Even though third quarter GDP came in strong than expected, other economic news left the week a net negative
Third quarter GDP points to better-than-expected recovery for now.
Third quarter GDP growth came in stronger than expected with a 3.5 percent gain, following a 0.7 percent dip in the prior quarter. The third quarter boost was the first positive GDP number since a 1.5 percent increase for the second quarter of 2008. While the third quarter gain provided a lift to investor spirits and stock prices, the real question is whether the latest GDP report points toward rising forward momentum or a possible stall. The detail is mixed on that issue.
The improvement in real GDP in the third quarter primarily reflected upturns in personal consumption, inventory investment, exports, and residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by a rise in imports, a downturn in state and local government spending, and a deceleration in federal government spending.
Indeed, some of the component numbers were encouraging at least at face value. PCEs rose an annualized 3.4 percent, led by durables with a 22.3 percent jump. While the latest numbers reflect an average for the quarter, a key issue is where forward momentum is. According to the latest personal income report (below), personal spending lost much of its momentum late in the quarter.
Residential investment made a partial rebound of 23.4 percent—the first gain since a 2.6 percent rise in the second quarter of 2006. The boost in housing clearly is a positive. But it has a very low base, resulting in a big percentage change, and growth in housing sales is stalling—meaning starts and housing investment will likely slow in coming months
Inventories did add to third quarter growth but the “increase” was actually less of a decline in the change in inventories. Businesses are still facing lean inventories and any rise in demand could boost production for inventories. However, consumer spending appears to be soft after cash-for-clunkers is discounted.
Both exports and imports were up after a string of negative quarters for both. Growth in global demand is a good thing and we are likely to see moderate gains in both exports and imports in coming months. Exports will be benefitting from a low dollar.
Cash for clunkers did add substantially to third quarter growth as motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. We will not be seeing this boost to production again.
Overall, the advance report for third quarter GDP was a positive—but probably not one with as much forward momentum as hoped. Other recent indicators on consumer and housing sectors also suggest that real GDP growth in the next couple of quarters will be very sluggish.
Econoday Senior Writer Mark Pender contributed to this article.
November 8th, 2009 at 8:43 pm
You are right, the numbers did look better as a whole,
but alot of of the gain is short term. We will probably see some better employment numbers also with the holidays coming on, but this also is short lived.