Tags: GDP | economy | election | president

First GDP Reading Will Have Out-Sized Attention as Election Looms

First GDP Reading Will Have Out-Sized Attention as Election Looms


By    |   Friday, 28 October 2016 08:10 AM

Today we’ll get the first release of U.S. GDP growth during the third quarter, which will have its impact on markets.

We could say, this is the first attempt to get the number and the data that will be revised for years to come. Indeed, the frequency and the size of the revisions mean that today’s data is a little more than a polite fiction.

Nonetheless, it matters for 2 reasons:

· First, the political cycle means, however irrationally, this will be seized upon on the campaign trail.

· Second, even though this is the worst quality data available, financial markets react to this data release, more than they react to the better quality subsequently revised data.

The market consensus is very upbeat looking for an annualized number around 2.6 percent, which will probably be considered to be above trend growth.

However, that number may still be too low, as high frequency data has been suggesting something even stronger.

There is little point reading too much into the preliminary estimate of a single number, but the broad story of the United States is of an economy operating around normal growth rates, with normal employment, at least for skilled workers, and normal inflation on the core measure. Indeed, the only abnormal thing about the U.S. economy at the moment would seem to be the Fed’s policy position.

In the Euro area we have preliminary October consumer price inflation from the French that came in unchanged at 0.4 percent year-on-year (y/y), and the Germans that stood in September at 0.7 percent y/y and that should come in higher for October and for which the numbers will be released later this morning.

With markets waking up to the fact that inflation never really went way, and with cross-country correlation of core inflation extremely low, this is important.

It suggests that at a national level the Euro area inflation experience is likely to continue to be divergent, even as the annual inflation rate rises.

That is the price of a dysfunctional monetary union.

Japan’s consumer price inflation remains negative as nationwide core consumer prices fell by 0.5 percent y/y in September. Household spending fell by 2.1 percent y/y in September, which is its seventh consecutive decline.

Japan is something of a perverse story however as Japanese consumers remain convinced that consumer price inflation is positive and indeed that it is higher than in any other industrialized economy. That belief in high inflation and consequently the belief of falling real incomes may explain falling household spending.

Besides all that, the so-called Comprehensive Economic and Trade Agreement between the EU and Canada, or CETA, has sprung in a “Lazarus-like” fashion from its death bead. The Belgian region of Wallonia has indeed agreed to do a deal, probably, and it has until midnight CET – Central European Time.

This is good news for trade, but the precedent of a EU trade deal being held hostage by EU provincial governments has been established, and it is that precedent that is going to hamper future EU trade negotiations with other countries.

The success of this particular case, if it is indeed successful, is not going to change that.

Investors should not forget that CETA can only be "provisionally" applied even after the EU governments and the European Parliament ratify it because to be fully put in place, it will have to be ratified by all 38 national and regional parliaments.

In China, the Communist Party has given President Chi the title of “core” leader of the Party, which is not a status quo from the actual situation, but which puts him along the historical figures like Mao Zedong and Deng Xiaoping who have proven that core leadership in China has no term limits.

For investors, this does not mean that things are set to change over the short term, but it will have its impact over the median term, no doubt about that.

All this raises 2 very difficult to answer questions:

· First, what sort of society China is likely to be, and

· Second, what sort of economy China is likely to have.

If China wishes to move from dynamic growth to innovative growth, which most economists would consider essential if it wishes to raise its standard of living meaningfully, then self-evidently it must innovate. The ability to innovate economically is closely linked to the political structure of any society.

Finally, it may be worth casting a quick glance at the Icelandic snap elections this weekend. Icelandic politics is only of sporadic interest to international financial markets, it’s true, but the anti-establishment or populist Pirate Party is one of the three largest parties in the current opinion polls.

The global political climate has become more sensitive to political populism, and while politics remain a local issue in most economies, there are market concerns about various national populist movements.

Ahead of the 2017 elections in the 2 largest EU economies (not taking into account the UK, which is still the second largest), which are France and Germany as well as in the Netherlands, and indeed ahead of the U.S. elections this year, investors may have heightened sensitivity to the electoral fortunes of anti-establishment groups.

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Today we'll get the first release of U.S. GDP growth during the third quarter, which will have its impact on markets.We could say, this is the first attempt to get the number and the data that will be revised for years to come. Indeed, the frequency and the size of the...
GDP, economy, election, president
Friday, 28 October 2016 08:10 AM
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