A Tale of Two GDPs

• German GDP increases by 0.1% in Q3, weight from investment fall

• NZD and AUD both lower on inflation, iron ore price falls

• US growth expected to expand by 3.3% in Q3, strong exports expected

• US consumer confidence also due, could hit 2nd consecutive record

Good morning,

Today’s markets are all about two GDP reports: one from Germany and one from the United States. The German reading has already taken place. The US’s is due at 13.30 and should show the divergence that is currently occurring between the economies of the Eurozone and the US.

German GDP gained a meagre 0.1% in Q3, matching last month’s initial estimate, but the internals of the release tell a very interesting story. Private consumption rose by 0.7% and government spending was 0.6% higher, with exports rising by 1.9%. Unfortunately, the rest of the internals were sharply negative. Capital investment fell by 0.9%, construction was down 0.3% and we saw a 0.2% fall in domestic demand. German companies are scared at the moment and are certainly shying away from investing. Of course there are a fair few reasons for this; the strongest being the ongoing lack of domestic demand in the Eurozone as a whole and the impact of sanctions imposed on the Russian state in retaliation to its movements in Ukraine.

Yesterday’s reading of business sentiment from Germany increased in November having fallen consistently from April. This is an obvious sign of stabilisation but there is nothing to suggest that a run of drastic improvement is forthcoming.

Today’s numbers will not cause the ECB to act any sooner. Indeed the Bundesbank Chair Jens Weidmann continued to rail against the ECB’s most recent efforts by saying that the focus on additional stimulus and quantitative easing “is distracting our attention from the true problems” of structural weakness in the euro area.

The euro is relatively unmoved by these numbers. As we open up in Europe it is down 0.1% against both the USD and GBP. The news from the US should be a lot more positive.

GDP in the three months to September rose at an annualised rate of 3.5%, we were told at the first iteration a month ago, well above the 3.0% economists had been looking for. The internals of said growth, however, gave us pause. Consumption fell to 1.7% from 1.8% in Q2 and although exports and investment ran higher, the standout figure was the highest increase in government spending since 2009, a function of expenditure on the Midterm elections that took place at the beginning of November.

We will be looking through these government numbers, however, as the second estimate of the GDP release furnishes us with a more granular detail as to the economy’s performance. Corporate profits will be expected to have moved higher in the three month period to September if the performance of the many US stock indices are to be trusted. Household spending is said to have fallen in September which may knock that consumption number lower on the quarter. The most important number in my eyes is trade. US exports rose in Q3 but the strong dollar and the weak outlook abroad may damage that as we head into the fourth quarter of this year.

More present data is due in the form of the latest consumer confidence numbers. There is the real possibility that these confidence surveys are very strong. Last month’s number showed the highest level of consumer confidence since September 2007 and there is no real surprise in the massive consumer confidence number; wages, jobless claims and purchasing power all in the consumer's favour.

Both the NZD and AUD are on the backfoot this morning as falling inflation expectations find more victims. A Reserve Bank of New Zealand survey of businesses published this morning showed that two year inflation expectations in the country had fallen to 2.06% from 2.23% a quarter previously. Unfortunately for the AUD, this added to pressures from falling iron ore prices and rumours of a new Chinese tax on iron imports. Iron ore is, of course, Australia’s main export to China.

Have a great day.