Global CIO Commentary by Scott Minerd
Economic data from Japan this week was much worse than expected. Japanese GDP decreased by an annualized 1.6 percent in the third quarter, despite forecasts that it would rebound by 2.2 percent. In Germany, the economy only narrowly avoided falling into a technical recession in the third quarter, expanding at 0.1 percent, a figure that will do little to alleviate concerns surrounding the euro zone’s main growth engine. Economic weakness around the world is being directly translated into the price of oil.
The short-term trajectory of oil prices will depend on a number of factors, including the growth outlook for Europe and Asia, as well as the global supply/demand dynamic. Despite the recent decline in market prices, producers in the Middle East have not yet cut back on production. With fracking having fundamentally increased output in the United States, I suspect that oil is at least ten dollars a barrel away from any kind of price support.
While gas prices at the pump have been heading lower recently, U.S. equities have been moving in the opposite direction. In this regard, the domestic economy will likely benefit from both the wealth effect of rising equity prices, as well as the consumer spending power released by the decline in gasoline prices. Lower gasoline prices act like a tax cut, leaving more money for American consumers to spend on other goods, which is likely to provide the U.S. economy with a boost as we head toward the all-important holiday shopping season.
Despite the positive backdrop for the nation’s economy, the current rally in U.S. equities has still not been confirmed in the NYSE Cumulative Advance/Decline Line and investors would be well advised to monitor this closely. Historically, a persistent divergence between the Dow Jones Industrial Average and the Advance/Decline Line usually leads to a correction in equities. Whether or not the Advance/Decline Line can catch up with the increase in equity prices over the next few weeks will determine whether the current rally is sustainable.
Source: Bloomberg, Haver, Guggenheim Investments. Data as of 11/17/2014. *Note: Data excludes recession periods. Discretionary spending is defined as personal consumption expenditures less food, energy, housing, and clothing expenditures.
Economic Data Releases
U.S. Economy Holding Up
- Retail sales for October beat estimates, rising 0.3 percent. Sales, excluding autos and gas, were even stronger, rising 0.6 percent, with 11 of the 13 major categories showing growth.
- Housing starts fell to an annualized pace of 1.01 million, down 2.8 percent from September. The drop was due to multi-family homes. Single family starts rose 4.2 percent.
- Building permits increased to 1.08 million in October, reaching a post-recession high.
- Existing home sales rose 1.5 percent in October to an annualized rate of 5.26 million, comfortably beating the 0.4 percent decline economists had predicted.
- The year-over-year inflation rate remained at 1.7 percent in October.
- The NAHB Housing Market Index rebounded in November to 58 from 54. Both present and future sales expectations rose.
- The Conference Board’s Leading Economic Index rose 0.9 percent in October after a revised 0.7 percent gain in September. Economists had predicted a 0.6 percent gain in October.
- Industrial production fell 0.1 percent in October, an unexpected decline after September’s 0.8 percent increase. The decrease was largely from falling utility output due to bad weather.
- Job openings were lower than expected in September at 4.74 million, but both the hiring rate and quit rate increased.
- Initial jobless claims decreased to 291,000 for the week ending Nov. 15. Claims have been below 300,000 for 10 straight weeks.
- University of Michigan Consumer Confidence continued to make multi-year highs in November, rising to 89.4.
- The Producer Price Index rose in October from September’s levels, but ticked down to 1.5 percent on a year-over-year basis.
Weak Growth in the Euro Zone, Recession in Japan
- GDP for the euro zone as a whole was slightly higher than expected in the third quarter at 0.2 percent.
- The euro zone November manufacturing Purchasing Managers Index declined to 50.4 from October’s 50.6, while the region’s services PMI also witnessed a decline, falling to 51.3 from 52.3 in October.
- Germany’s third-quarter GDP grew at 0.1 percent following a 0.1 percent decline from a quarter earlier. Growth was driven mostly by consumption.
- The German ZEW Survey was better than expected in November, with the current situation index mostly flat while the expectations index rebounded to a four-month high.
- Germany’s manufacturing PMI slipped from 51.4 in October to the no change level of 50.0. Germany’s services PMI is still expanding, but the pace of growth in activity fell from 54.4 in October to 52.1 in November.
- French GDP surprised to the upside in the third quarter, growing at 0.3 percent. The previous quarter was revised into negative territory.
- The pace of decline in the French manufacturing PMI has accelerated to 47.6 in November from 48.5 in October. The French services PMI saw its pace of decline ease to 48.8 in November from 48.3 in October.
- GDP in Italy fell for a second consecutive quarter in the third quarter. The Italian economy has not had positive quarterly growth since mid-2011.
- China’s fixed-asset investments slowed to 15.9 percent year over year in October, a nearly 13-year low.
- Chinese retail sales growth decreased to 11.5 percent year over year in October, the lowest since 2006.
- Industrial production in China missed expectations in the October reading, cooling to 7.7 percent year-over-year growth.
- China’s HSBC manufacturing PMI fell to 50.0 in November from 50.4 in October, a six-month low.
- Japan’s third-quarter GDP was unexpectedly negative at a 1.6 percent annualized decline, pushing Japan into a technical recession. Domestic demand was especially weak, dragging down growth.
- Japanese year-over-year exports grew 9.6 percent in October, the fastest pace of growth in eight months.
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