31 Oct THE FED DID AS EXPECTED EVEN AS GDP SURPRISED ON THE UPSIDE
The first print of third quarter GDP validated my long held view of today’s recessionary fears are vastly overblown. The economy expanded at a 1.9% annualized rate versus the consensus view of a 1.6% pace. Perhaps the most significant aspect of the report is disposable income rose at a 2.9% rate after a 2.4% pace in the prior quarter.
This in turn supported consumer spending which was the catalyst for the higher than expected print. The Fed’s preferred inflation measure rose by 2.2%, nominally higher than the 2.0% Fed mandated speed limit.
The private sector ADP Employment Survey was also stronger than expected, indicating a 125,000 increase in jobs in October. I must write September’s increase was revised nominally lower reflecting the moderate gains that occurred in September’s BLS report.
Speaking of which tomorrow the BLS releases its employment report. I am certain the Fed had access to this data for yesterday’s meeting.
As widely expected, the Committee lowered again lower rates by 0.25%, the third such reduction of the year. It also indicated that it will pause for the intermediate future to determine the impact of it prior actions. The Fed also confirmed what the data above suggests…a moderately strong economy where job and income gains are supporting the consumer with inflationary expectations little changed. Manufacturing and trade are noted as the “uncertainties.”
Markets were little changed on the outcome. Equities staged a late day rally following the press conference where FRB Chair Powell stated he will not increase rates if inflation remains persistently cool.
Changing topics, earnings have been mixed. In my view perhaps the biggest surprise is the general lack of volatility following profit/revenue misses of three of the five company cohorts known as “FAANG.” Several other high profile tech companies that have missed earnings have been crushed anywhere from 15% to 45%. Wow! Moreover the two FAANG that exceeded expectations also had minimal volatility on a relative basis.
What is this suggesting?
Last night the foreign markets were mixed. London was down 0.90%, Paris down 0.43% and Frankfurt down 0.29%. China was down 0.35%, Japan up 0.37% and Hang Sang up 0.90%.
The Dow should open moderately lower as Chinese officials are casting doubts about reaching a comprehensive long term trade deal. The 10-year is up 10/32 to yield 1.74%.