U.S. GDP growth pops to 3.6% in today’s second estimate, but that’s not as meaningful for a Fed taper as it seems
I’m starting to long for some conclusive economic news—even if it is bad economic news.
Today’s release of revised third quarter GDP growth is frustratingly inconclusive—if you’re looking for, as the market is, a strong trend that might indicate which way the Fed will jump on the taper/no taper decision at its December 18 meeting.
The headline number shows a very strong economy. The revised numbers say that third quarter GDP growth came in at 3.6%. That’s a big jump from the 2.8% in the first estimate of third quarter GDP growth and a significant increase from the 2.5% growth rate in the second quarter
If we could take these numbers at face value—and, more importantly, if we were convinced that the Federal Reserve would take these numbers at face value—then I think we’d be looking at a strong argument for believing that the Fed would start to reduce its $85 billion in monthly asset purchases with the December 18 meeting.
But we can’t take these numbers at face value—and I’m certain that the Fed won’t. The big increase in revised third quarter growth doesn’t show an acceleration in the economy’s growth rate. Instead the jump from first to second estimate is due to a big increase in inventories. Growth in inventories, I’d point out, is only a good thing if those inventories get sold. If they don’t, if goods sit on warehouse shelves, inventories become a big negative for economic growth in the next quarter.
Real final sales, a number that excludes inventories, actually got revised down in today’s estimates to 1.9%. That’s a drop from 2% growth in the first estimate for third quarter GDP and is down from a 2.1% growth rate in the second quarter.
Personal consumption spending also got revised downward to 1.4% from 1.5% today, supporting the slight downward trend in real final sales. Personal consumption spending, what you and I call consumer spending, increased by 1.8% in the second quarter so today’s downward revision shows an even bigger slowing in consumer spending than the first estimate did.
Given the inconclusive nature of today’s GDP numbers, I think we’re set up to have the financial markets react relatively strongly to tomorrow’s jobs numbers for November. The consensus of economists surveyed by Briefing.com calls for the economy to have added 185,000 jobs in the month. That would be below the 204,000 added in October.
It’s “when” and not “if” on a tapering off of the Federal Reserve’s $85 billion a month in purchases of Treasuries and mortgage-backed assets.
The minutes released yesterday from the October meeting of the Federal Open Market Committee argue that the Fed wants to move to reduce those purchases.
Speeches by Fed governors and by Fed chairman Ben Bernanke point in the same direction.
But for me the most compelling argument is that posed by the Fed’s invention of something called a fixed-rate, full-allotment overnight reverse-repurchase facility (or RRP.) This new tool would let the Fed shield money market funds from the worst effects of some of the tools that the Fed might employ to minimize the negative impact of a taper
Here’s why RRPs are significant. (And, of course, it’s the consensus belief that the Fed won’t taper before March that is letting stocks move upwards now.) Read more
At least the Federal Reserve is giving us Thanksgiving week off.
But this week is jammed with Fed news and speeches.
We’ve got chairman Ben Bernanke speaking tonight at 7 p.m. Eastern at the National Economists Annual Dinner. Sarah Bloom Raskin, a current member of the Fed’s board of governors, will testify in the Senate tomorrow as part of the confirmation process for her nomination as Deputy Treasury Secretary. And governors Jerome Powell and Daniel Tarullo will give speeches on November 21 and November 22.
But the big event is tomorrow’s release of the minutes from the Federal Open Market Committee’s October meeting. Markets will be slicing and dicing those minutes for clues on the Fed’s thinking on how soon the central bank might begin to taper its current $85 billion a month in purchases of Treasuries and mortgage-backed assets.
The likelihood that there will be anything new in the minutes is small but the financial markets are perfectly able to make a big move on a perception of a change in policy even if there isn’t one. The timing of The Taper is THE big current market mover
The mere possibility that something in the minutes will move the markets is enough to produce extreme caution today. Since the reaction to the minutes is essentially a random event, I don’t think you’re likely to see anybody go out on a limb either long or short today.
At the moment the Fed calendar next week and after Thanksgiving is pretty clear until the December 18 meeting of the Federal Open Market Committee. That will give us real news—of typical Fed clarity, of course—on the central bank’s thinking about the timing of any taper
It’s not too early to call it “The Yellen put.”
In her November 14 testimony before the Senate Banking Committee, Janet Yellen, who President Obama nominated to succeed Ben Bernanke as chairman of the Federal Reserve on October 9, made it clear that she’s even more cautious about moving to slow the Fed’s monthly purchases of $85 billion of Treasuries and mortgage-backed securities than Bernanke
She repeated the Fed’s existing focus on reducing unemployment to something like 6.5% (from the current 7.3% rate) before the central bank began any taper in its purchases. The financial markets have recently started to fret that this focus wasn’t enough to guarantee that The Taper wouldn’t start in December or that the Fed would keep short-term interest rates near 0 until 2015. And that has led to some fraying of the Bernanke Put—a belief that if the economy or financial markets stumbled, the Fed would step in.
But what the financial markets heard in the first stage of Yellen’s confirmation hearings was an even stronger endorsement that of the Put than they’d heard from Bernanke.
Yellen added strong comments indicating that the Fed is worried that inflation is so low that it has raised fears at the central bank that the economy could slip into deflation. Read more
Remember when developing economy currencies and emerging market stocks fell as bets that the Federal Reserve would begin to taper off its $85 billion in purchases of Treasuries and mortgage-backed assets sooner rather than later caused the U.S. dollar to climb?
In August when everyone was convinced that the Fed would begin The Taper at its September meeting, emerging market currencies and assets slumped. For example, on August 21 the iShares MSCI Brazil ETF (EWZ) hit a low of $41.26, finishing off a 24.9% slide that had begun on May 20.
We’ll we’re seeing a replay now. Emerging market shares have tumbled for nine days in a row, the longest slide since 2006. The iShares MSCI Emerging Markets Index ETF (EEM) has declined to its lowest level in two months.
Developing economy currencies have moved lower too. The Indian rupee has fallen to an eight-week low. On November 12 the South African Rand hit its lowest level in two-and-a-half months.
The driver for this decline is a belief that the odds have improved that the Fed might begin The Taper at the December 18 meeting of the Federal Open Market Committee. The majority opinion among economists, according to a Bloomberg survey, still points to an initial move at the committee’s March 19 meeting, but the odds on a December or January taper have improved recently. At the end of October, Citigroup, for example, raised the odds on a December taper to 20% from 10% and on a January taper to 45% from 25%. I don’t think the rest of Wall Street has moved that strongly toward a December or January taper, but the Citigroup change gives you a good idea of the trend.
It’s not so much that the consensus has changed radically as that traders see more of a need to hedge positions in case the consensus is wrong.