26 Jul GPD AT 8:30
Initial estimates of second quarter GDP is released at 8:30. Analysts are expecting a 1.8% growth rate as the decline in inventories is expected to subtract about 1.3% from growth. This is the inverse from the first quarter when inventory accumulation added to GDP. Consumer spending is expected to increase by the most since 2014, partially the result of strong job gains and rising wages.
A 1.8% growth rate would be the slowest growth since the first quarter of 2017, but is around the average pace experienced during the Obama Administration.
Recent data including yesterday’s release of the notoriously volatile durable goods data, which jumped by the greatest amount since February 2018, and weekly jobless claims which fell to a fresh five week low are around the lowest levels in over fifty years, is suggesting the economy may not be as weak as many are suggesting.
Yesterday the head of the ECB commented that he believes the EU environment is worsening, the reason for his continued dovish stance including maintaining a negative interest rate of 0.4% and planning another round of monetary stimulus as soon as September. As a result both the German 10 year bund yield and French 10-year fell to a record low yield of -0.41% and -0.16% respectively.
According to Bloomberg 80% of Germany’s debt now has a negative yield. Almost the entire Danish government debt is negative yielding. The indebted country of Greece now has a 10-year yield of 2%, around the same levels as Italian debt. Two months the fiscal pressures in Italy and Greece were major news.
The only country that does not have negative yielding sovereign debt is the US [Note: Is this not a paradox as the US 10-year Treasury is yielding around the same level as Greek and Italian debt? Who ever said financial markets are rational?]
Again referencing Bloomberg negative yielding bonds now make up about a quarter of the investment grade Barclay’s Global Aggregate Index. Wow!
What will be the result of today’s environment? Perhaps the only concrete comment to write is that no one knows as there has yet been a chapter written about today’s environment in a bond math or economic book. Yesterday’s academic studies declaratively stated that such would never occur.
Perhaps a cynical statement to write is maybe every central banker is wrong. That there is something bigger involved such as the non-elected bureaucratic state that is stifling growth, a major reason why the populist economic nationalist movement as to which President Trump is only the symptom of not the cause, is sweeping the industrialized democracies.
Commenting briefly upon yesterday’s market action, equities fell on earnings. The tech heavy NASDAQ fell about 1.0% while the Dow declined about 0.5%. Regarding the ECB, can it be suggested that equities have already priced in any type of monetary stimulus and the reaction to any type of further intervention will be muted unless it is bazooka sized?
I think yes.
Last night the foreign markets were mixed. London was up 0.63%, Paris up 0.53% and Frankfurt up 0.36%. China was up 0.24%, Japan down 0.45% and Hang Sang down 0.69%.
The Dow should open nominally higher on mixed earnings and optimism about a dovish outcome of next week’s FOMC meeting. The 10-year is up 4/32 to yield 2.07%.