This week we cover, UK and US GDP data, the latest on the US election and the surprising impact of soybean exports on US GDP
US GDP numbers show that around 1% of the 2.9% Q3 increase was down to soybeans. El Niño’s affect on South America’s harvest left a hole that US producers could plug with inventories. While this is good as inventories had been a drag on GDP for the last five quarters, they don’t represent a growth in value. Revisions to this early number given the incomplete data used for calculation may well be on the downside, which won’t please the bean counters.
UK GDP SURPRISES
The UK grew at a rate of 0.5% in Q3, slowing from the rate of 0.7% in Q2, but comfortably beating the consensus of 0.3%. The figure was seen as positive in the wake of Brexit and showed that the economy was not yet in shock from any adverse consequences due to the UK Referendum. Looking in more detail, it was clear that the increase was solely dependent on a 0.8% increase in the services sector, which masked a contraction in industrial production and construction of 0.4% and 1.4% respectively.
US RATE HIKE ON THE CARDS?
US GDP data rose at an annualised rate of 2.9% in Q3. This was above the consensus of 2.6%, a leap of 0.7% in Q3 versus Q2 and the best GDP growth in two years. This has led to an increase in the probability that the Federal Reserve could raise rates for the second time in 10 years, with a hike in December most likely. However, economists believe that the GDP number is likely to be revised downwards in the future. The market also appears to be complacent about the chances of a rate hike, with probabilities down to on Friday to just 69%.
NEW LIFE FOR TRUMP CAMPAIGN
Trump’s presidential campaign was given a new life line after the FBI Director, James Comey, disclosed that the agency is reviewing a new batch of files relating to Hillary Clinton’s use of email. Clinton’s allies rushed to her defence with some accusing Comey of breaking the law. The polls had already begun to tighten before the news, but this now puts the presidential race into uncharted territory. The impact though is hard to judge given at least 21 million voters have been to polling stations, and almost a quarter of the electorate in key swing states have already cast their vote.
The bond markets saw dramatic movements in the last few days with bond prices crashing and yields spiking. This was the worst performance in global markets for three years. The biggest sell off and rise in yields was in the UK where the return on a 10-year Gilts rose to a post-Brexit referendum high. This means posting their largest loss since the global financial crisis in January 2009.
Given our underweight position in bond markets, these movements have hardly impacted our portfolios versus our peer group. Meanwhile, the US inflation rate protection notes are having a positive impact with a surge in demand as investors digested the US macro economic numbers and any likely reaction by the Federal Reserve.
THREE ANNOUNCEMENTS DUE THIS WEEK
2 November - Fed Interest Rate Decision // 3 November - Bank of England Interest Rate Decision // 3 November - US PMI
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SOURCES: BLOOMBERG; 7IM