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Was Yesterday’s Print of Third Quarter GDP Growth of 3.5% Validated the Fed’s Nominally Hawkish Tone?

Was yesterday’s print of third quarter GDP growth of 3.5% validated the Fed’s nominally hawkish tone?  I think yes.

As widely noted, consensus expected a 3.0% rate.  Exports and government spending led by military spending—the biggest increase since 2Q09—were the major reasons for the surprise.  Real final sales (GDP less inventories) of 4.2% climbed the most since 2010.

The economy has now marked the strongest back to back quarterly growth since the last six months of 2003.

Many are questioning if this growth is sustainable given the perceived global slowdown and rising value of the dollar that should impact exports.  Consumer spending, which accounts for almost 70% of the economy climbed at 1.8% pace after growing at a 2.5% rate in the previous three months.

In my view yes.  Real disposable income increased by 2.7% with prospects of yet even greater gains given the collapse of oil prices and gains in employment.

Regarding oil prices, it is generally accepted the $25 drop in crude will shift about 1.5% of global GDP from oil producers to oil consumers.  The US is the largest global oil consumer.

Commenting about jobs, weekly jobless claims rose nominally and the four week moving average declined to the fewest since 2000.

And then there is the savings rate which at 5.5% is the highest quarterly average since the end of 2012.  A combination of low inventories and pent up consumer buying power suggests GDP growth over 3.0% is indeed sustainable.

Commenting upon yesterday’s market activity, the Dow gained about 1.3% as Visa rallied substantially on profits.  The Russell 2000 was up about 0.85% on earnings while the NASDAQ was almost flat.

What will happen today?  Personal spending/income, the employment cost index, a regional manufacturing index and confidence survey are released.  How will this data be interpreted?

Last night the foreign markets were up. London was up 1.11%,  Paris up 1.92%  and Frankfurt up 1.75%.  Japan was up 4.83% and Hang Seng up 1.25%.

The Dow should open should open considerably higher following Japan’s unexpected announcement expanded its stimulus program and the country’s pension fund increased its allocation to foreign stocks.   The 10-year is off 8/32 to yield 2.34%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.