Q3 GDP Rises 2.8% on Strong Domestic Demand (GS)
Real GDP rose 2.8% annualized in the advance reading for Q3, 0.1pp below consensus expectations. The composition was strong, as real private domestic final sales increased by +3.2% annualized and the volatile inventories component subtracted 0.2pp from GDP growth this quarter (0.5pp below our expectations).
Consumption increased 3.7%, above expectations.
Business fixed investment increased +3.3%, reflecting an 11.1% increase in equipment investment, a 0.6% increase in intellectual property products investment, and a 4.0% decline in structures investment.
Government spending growth increased by more than we expected to +5.0%, reflecting a 9.7% increase in federal spending—driven by a 14.9% rise in defense spending—and a 2.3% increase in state and local government spending.
The GDP price index rose by +1.8% (QoQ AR), slightly below expectations and partly reflecting a slowdown in the consumption (+1.5%) and exports (-1.4%) deflators.
Core PCE prices rose +2.16% annualized in Q3, slightly above consensus expectations.
Weakening?
BTW, Consumer spending rose 3.7%, the strongest quarterly increase since Q1-2023, led by a 6.0% rise in goods spending.
BTW #2: Payroll processor ADP said its measure of private-sector job growth unexpectedly surged ahead in October. ADP said employers added 233,000 jobs in October, up from a revised 159,000 in September. That is the strongest job creation reported in 15 months, and it occurred despite major hurricanes in the Southeast that analysts expected would drag down payroll numbers. (Axios)
China Economy Picks Up on Stimulus Push Ahead of US Election Still-weak new export orders weigh on manufacturing sector
Factory activity unexpectedly expanded in October after five months of contraction, the National Bureau of Statistics said Thursday. The official manufacturing purchasing managers’ index rose to 50.1, higher than a forecast of 49.9 by economists. The non-manufacturing PMI showed activity in construction and services expanded after staying little changed the previous month. (…)
Data released Thursday showed new export orders for manufacturing companies remained weak and continued to contract this month, even as overall new orders stabilized. (…)
The fog around Beijing’s fiscal stimulus is slowly dissipating. Investors are beginning to believe that the economic rescue mission entails putting a floor under a potential crisis, rather than driving a new wave of growth. The challenge has never been in doubt — rather, it’s about the effectiveness and timeliness of the firepower to be deployed.
If reports are anything to be believed, a fiscal package of about $1.4 trillion, or 10 trillion yuan, falls below the initial estimates of up to $3 trillion as what’s required to make a meaningful impact on the Chinese economy.
Given the whatever-it-takes stance that officials signaled before the Golden Week break, investors shouldn’t be dismissive of the package, even if it falls short of what they they think necessary. With the rally in Chinese equities long halted, it’s possible that investors are just biding their time. Both the CSI 300 index of stocks quoted in Shanghai and Shenzhen, and the offshore “red-chip” companies in Hong Kong’s Hang Seng China Enterprises Index have been going sideways. (…)
Even without the government pressing heavily on the accelerator, the economy is recovering. That shows up in the latest PMI numbers, for October. Further, the research group China Beige Book shows that consumer spending rose in October, with a more active Golden Week than in 2023, suggesting that the splurge of reforms announced before the break had an impact. Among the consumer sectors, hospitality firms saw the strongest sales expansion while chain restaurants also improved:
The troubled property sector remains in the doldrums, however, despite the extra policy support, with firms reporting another monthly slowdown in sales prices. It has had a protracted slump that cannot be reversed overnight, but the point for policymakers is to put a floor under the sector. That means that evidence reported by China Beige Book that interest rates are actually rising, despite the central bank’s attempt to ease them, is disconcerting:
This is a risk, if stimulus turns out to simply mean more money for the supply side. October’s credit data had a surprise: Interest rates went up, not down, per firms on the ground. More evidence that Beijing’s credit transmission mechanism is not working as quickly as assumed — or possibly at all. Investors should remain skeptical of monetary easing boosting the economy.
It will garner little attention given next week’s other events, but the National People’s Congress Standing Committee will hold a meeting where the 10 trillion yuan fiscal boost could be approved. The package is expected to include 6 trillion yuan for debt replacement for local governments and 4 trillion yuan earmarked for buying property. If these impressive figures are passed, their overall impact could still be limited.
The debt exchange amount barely scratches the surface of overall local credit overhang. Bloomberg Economics’ David Qu and Eric Zhu argue that it’s inadequate, given that local government financing vehicles have massive “hidden debt.” The IMF estimate is 60 trillion yuan. Regardless, Gavekal Research’s Andrew Batson believes these efforts do show a new urgency:
To keep Local Government Financing Vehicles from defaulting, local governments need to prioritize supporting these hidden debts. One way they do that is by delaying other payments, creating another implicit debt that does not accumulate interest. LGFVs are, in turn, delaying payments to other companies, adding to a liquidity squeeze for the private sector. Any fiscal expansion would get diverted to dealing with these debt burdens.
(…)
China Is Becoming a Bigger Problem for Europe’s Profit Scorecard Industrials, tech among sectors warning about profit weakness
A broadening array of European firms is blaming China for glum earnings outlooks, as weak demand, government scrutiny and tariff spats with the trading partner put pressure on stocks.
Beyond China-reliant sectors such as luxury goods and miners, chip equipment giant ASML Holding NV, medical technology firm Royal Philips NV and French electrical-equipment distributor Rexel SA are among those that have raised concerns about Chinese demand.
Shares of all three are down in October after they cut guidance. Philips and ASML are set for their worst months in at least two years, buffeted by various headwinds including weaker demand, tighter regulations or the prospect of export restrictions.
“Weakness in demand from China started in a few sectors and has spread out beyond the consumer,” said Mark Schumann, head of European large-cap mutual funds at DWS. “The reasons for this weakness appear to be more complex and multi-layered,” he added, citing a prolonged property crisis in the country and higher regulatory scrutiny of US and European businesses.
An analysis by Barclays Plc found that European company executives had a negative tone 65% of the time when discussing China on post-earnings conference calls — the worst among topics that included the economy, profit margins and layoffs. That’s despite Beijing’s broad stimulus efforts unleashed in September to boost growth. (…)
While China accounts for about 8% of European firms’ overall revenue, some industries like luxury rely on it for up to a quarter of annual sales. Tech investor Prosus NV gets 74% of its revenue from there, while miners generate between 20% and 60%, according to data from Goldman Sachs Group Inc.
Many of these firms aren’t seeing much reprieve yet. Cosmetics maker L’Oreal SA said China’s beauty market continued to deteriorate, while LVMH warned consumer confidence was similar to the “all-time low reached during Covid.”
The world’s biggest brewer Anheuser-Busch InBev NV and Danish peer Carlsberg A/S both reported lower volumes Thursday, partly due to weak demand in China. (…)
An unprecedented rise in the 10-year Treasury yield
Over a rolling 30-day period, the 10-year Treasury yield has climbed over 65 basis points, a magnitude of change exceeded in only 4% of trading days since 1962.
Although a 65 bps increase over 30 days has occurred 47 other times when using a reset below zero to eliminate repeats, none took place in tandem with the Federal Reserve’s initial rate cut until now.
Whenever the 10-year Treasury yield rose by 65 basis points over 30 days, coupled with a Fed easing cycle featuring one to three rate cuts, the benchmark yield often decreased over the following months. From three to twelve months later, yields dropped in the 1980s, whereas post-1995, they tended to increase.
Except for an untimely signal in 1981, which occurred within the context of a bear market, a scenario unlike today, the S&P 500 rallied consistently across all time frames, culminating in a 100% win rate over the next year.
The market’s ability to absorb a sudden and sharp rise in rates suggests that economic fundamentals were healthy during these periods, providing a positive backdrop for equities. (…)
Many factors could be driving the sharp and sudden surge in the 10-year Treasury yield. Those include a resilient economy, Treasury issuance, or a technical bounce in yields following a decline. Regardless of the narrative, similar spikes in the 10-year Treasury yield near the outset of a Federal Reserve easing cycle have often reversed, leading to lower yields over the subsequent months.
Notably, these reversals have correlated with S&P 500 rallies, especially over the following year. This trend likely reflects a healthy economy that fuels corporate profits, fostering a more favorable stock market environment.
Meanwhile, from Goldman Sachs:
The borrowing estimates released on Monday showed $546bn in net borrowing for 4Q24 and $823bn for 1Q25, with assumed end-of-quarter cash balances of $700bn and $850bn, respectively.
While the borrowing numbers came in somewhat above our projection, once adjusted for TGA assumptions the discrepancy appears to reflect a more front-loaded (and only slightly higher overall) path for deficits than our projections.
Treasury’s cash balances and privately held borrowing estimates imply around $71bn and $382bn in net bill issuance to the public for 4Q24 and 1Q25, respectively.
1Q25 numbers assume a debt limit suspension or increase that quarter, but an extended debt limit impasse could see significantly more back-loading of bills supply in 2025 (and a larger TGA drawdown in H1.)
Most importantly, Treasury maintained the guidance on keeping nominal and FRN sizes unchanged for “at least the next several quarters,” but kept some flexibility by noting this guidance is “based on current projected borrowing needs.”
America’s stock market optimism
The largest share of Americans on record believe the run will continue, Axios’ Courtenay Brown writes.
The Conference Board, a business research group, asks consumers whether they expect stock prices to increase in the coming year. In October, slightly more than half said yes — the highest reading in the survey’s history.
Ed Yardeni’s chart on II Bulls & Bears is not quite as extreme:
