U.S. Q3 GDP Comes in Stronger than Expected

U.S. yields continued to climb following a robust Q3 GDP report. The U.S. Commerce Department reported on Friday that U.S. GDP increased by 2.9% in the Q3, following the 1.4% Q2 pace, and 0.8% in Q1. This was larger than expected and higher than the current forecast of 2.1% reported by the Atlanta Federal Reserve.  The increase is the briskest pace since Q3 2014. There was a 2.1% surge in Private consumption. Fixed investment remained negative but was up from the -1.1% in the previous quarter to -0.6%. Government consumption increased by 0.5% from -1.7%. Inventories added $22.1 billion to growth following the $50.2 billion subtraction in the prior quarter. The chain price index slowed to a 1.5% rate from 2.3% while the core price index rose 1.7% versus 1.8%.

Productivity might be rising as costs for employees declined slightly per the U.S. employment cost index. The ECI showed a 0.6% increase in Q3, flat quarter over quarter while wage and salary growth increased by 0.5% versus 0.6% in the prior quarter.  Benefit costs increased to 0.7% from 0.5%. Private sector ECI rose 0.5% in Q3 versus Q2’s 0.6%. Government employment costs jumped 0.9% from 0.5% previously, thanks to a 1.2% surge in benefits, doubling the prior 0.6% pace.

Confidence in the EMU was buoyed as the ESI showed an increase in October, with the overall reading coming in at 106.3, versus expectations for a modest rise to 105.0 from 104.9 in September. The breakdown showed a broad-based improvement, across manufacturing and services sectors, as well as consumer confidence, although the latter remains in negative territory, as does manufacturing sentiment. Overall though October confidence numbers suggest that at least for now the Brexit scenario hasn’t dented the growth outlook.

On the inflation front, German state inflation data a tad higher than expected, leaving our forecast for a pan German rate of 0.8% year over year and an HICP rate of 0.6% year over year with a slight bias on the upside. Negative base effects from lower energy prices are starting to fall out of the equation, which is lifting annual rates and the breakdown for CPI, the most populous state showed transport price inflation picking up to 1.6% year over year from just 0.3% year over year in the previous month.