The US economy’s growth was less robust than anticipated in September, as indicated by the latest update from the Chicago Fed National Activity Index (CFNAI), which uses a three-month moving average (CFNAI-MA3). The most recent figure dropped to -0.09, the lowest level since this past May. While this decrease is notable, it still keeps the index significantly above the critical -0.70 level, which according to Chicago Fed guidelines, signifies the onset of recessions. Thus, although a downturn was avoided last month, economic growth appears sluggish and is expected to continue in this manner for the foreseeable future. In fact, the Atlanta Fed’s current nowcast as of October 20 estimates a modest third-quarter GDP growth of just 0.9% (seasonally adjusted annualized rate), a stark contrast to the stronger 3.9% increase recorded in the second quarter.
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This October, consumer discretionary stocks have outperformed other major US equity sectors, based on trailing one-year total return data from various ETF proxies. After recently surpassing healthcare stocks, the Consumer Discretionary SPDR ETF (XLY) has increased its performance advantage over competitors throughout October.
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● US mortgage applications rebound following the regulatory change | CNBC
● US existing home sales are anticipated to show a slight increase in September | MNI
● French business confidence reaches a four-year high in October | Bloomberg
● UK retail sales experience a significant rise in September | MNI
● The ECB is expected to signal additional stimulus measures today | Reuters
● Spain’s unemployment rate drops to a four-year low in Q3 | Bloomberg
Expectations indicate that the three-month average of the Chicago Fed National Activity Index (CFNAI) will show a slight increase in the upcoming September update scheduled for tomorrow (Oct. 22). This prediction is based on The Capital Spectator’s average point forecast from multiple econometric models. The anticipated reading of +0.05 slightly exceeds August’s +0.01 value, suggesting that US economic activity is nearing its historical trend growth rate. According to Chicago Fed guidelines, only negative values below -0.70 point to an increased likelihood of a recession. Hence, the expected CFNAI reading for September suggests an expansion slightly above historical trends, thus remaining comfortably above the recessionary threshold.
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The chief international economist at Deutsche Bank argues that the US is not on the brink of recession. “There is a significant divide between the prevailing narratives in equity and rate markets and the actual economic data,” he states via Bloomberg. “This economy is more robust than its reputation suggests, yet many investors cling to the outdated story of post-2009, where ‘the economy is struggling’.”
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● US housing starts saw an increase in September, nearing an eight-year high | MarketWatch
● GDPNow model’s Q3 growth estimate remains unchanged at 0.9% | Atlanta Fed
● Redbook reports that US retail sales have declined in the first half of October compared to September | DJ
● Deutsche Bank’s Sløk claims the US is not heading into recession | Bloomberg
● The ECB faces challenges in accelerating quantitative easing | Bloomberg
● Japan experiences a slowdown in export growth due to declining demand from China | MNI
Residential construction in the US gained traction in September, driven by a notable rise in new multi-family projects, with a solid increase of 6.5%, as reported by the Census Bureau reports. This increase exceeded forecasts and points to the enduring recovery of the housing market. However, newly issued building permits fell by 5% last month, indicating that future growth may remain moderate.
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The inconsistent recovery of the economy is proving difficult for investors to factor in higher US Treasury yields. Nonetheless, the ongoing political gridlock in Washington may inadvertently contribute to rising rates. In fact, certain short-maturity Treasuries, perceived as vulnerable due to concerns over the debt ceiling, have experienced so much selling that their yields have surged to two-year highs, as reported by The Wall Street Journal. While dysfunctional politics are nothing new, this scenario might yield a novel and unintended consequence: elevated rates.
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● US homebuilder confidence reaches a decade high in October | The Atlantic
● SF Fed President Williams suggests there is a strong case for a US rate hike soon | Bloomberg
● Treasury Secretary Lew expresses concern over the debt ceiling deadline on November 3 | CNBC
● T-bill yields spike to a two-year high amid debt ceiling concerns | WSJ
● Lending standards in the Eurozone continue to ease | RTE
● Germany sees continued deflation in factory prices for September | MarketWatch
● Trudeau’s election as Prime Minister reinstates the Liberals to power in Canada | BBC
In the September update scheduled for tomorrow, housing starts are anticipated to increase moderately to 1.147 million units (seasonally adjusted annual rate), according to The Capital Spectator’s average forecast from various econometric models. This projection marks an uptick from the 1.126 million units reported last month for residential construction activity.
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In summary, while recent economic indicators such as consumer discretionary stock performance and housing starts suggest some positive trends, overall growth remains tepid as various sectors navigate challenges. Continued attention to these evolving dynamics is vital for understanding the broader economic landscape and making informed predictions for the near future.