Global Daily – US: let the good times roll

by: Maritza Cabezas , Nick Kounis

Global-Daily-Insight-26-November-2014.pdf ()
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  • The third estimate of US GDP showed an economy growing even more strongly…
  • …and we expect it to continue growing at above trend rates in coming quarters
  • ECB could ease TLTRO conditions in December, but delay new asset purchases to Q1

US GDP growth even stronger in Q3

The US economy is expanding strongly. The third quarter GDP growth estimate was revised upwards to 3.9% from a previously reported advance estimate of 3.5%. This was the result of stronger growth in consumption and business spending, while exports increased less than previously estimated. In the past six months the US economy has been growing at the fastest pace in a decade after it grew by 4.6% in the second quarter.

Strong consumption and investment behind the solid data

Consumption which accounts for 70% of the economy, grew at 2.2% in the third quarter after increasing by 2.5% the previous quarter. We expect consumption growth to be the main driver of growth in the coming quarters. Indeed, the recovery of the labour market and lower energy prices point to an acceleration in consumer spending growth. Meanwhile business investment is now estimated to have grown by 7.1% compared with an increase of 9.7% in the second quarter. Investment in equipment continues to grow at double digit rates. The increase in capital spending is a result of stronger balance sheets and higher profits. Looking ahead regional surveys indicate that most firms say they will increase capital spending in the coming six months. In this same report, corporate profits increased by 2.1% after an 8.1% gain in the previous quarter. As wage growth begins to accelerate, we expect corporate profits to show more modest growth. Given the upbeat economic outlook, we expect the slack in the labour market to diminish, suggesting that the Fed is on track to raise interest rates in mid-2015.

US consumer confidence less upbeat, but should rebound

Yesterday’s consumer confidence report from the Conference Board fell to 88.7 in November from 94.1 the previous month. The fall does not fit in with the strong labour market and declining gasoline prices. It is also at odds with November’s University of Michigan Consumer Confidence index which rose to a seven year high this month. In any case the level of consumer confidence is still elevated and consistent with a strong economy. We expect consumer confidence to rebound in the coming months.

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ECB could ease TLTRO conditions in December, but delay new asset purchases to Q1

Speculation about what the ECB will do next has reached fever pitch over recent days. This has been triggered by dovish speeches by ECB President Draghi last week, which left little doubt that the central bank is likely to ease policy further. Two important questions remain however. When will they move?…and what will they do? A number of ECB officials earlier this week (including Vice President Constancio and Executive Board member Coeure) signalled that the central bank would wait until Q1 to assess the impact of current measures before deciding on fresh asset purchases.

Our base scenario is that the ECB will extend its asset purchases to agency debt and corporate bonds, with the aim of expanding its balance sheet by around a trillion euro. However, a lot depends on the success of the December TLTRO. If the December TLTRO does not see a big take up, the ECB might struggle to meet its one trillion euro target without venturing into sovereign bond purchases. Given that sovereign bond purchases are strongly opposed by a number of officials, the ECB will want to do all it can to boost the take-up of the December TLTRO. At the same time, the fall in the yields on covered bonds, has made the TLTRO relatively less attractive. We therefore think there is a strong possibility that the ECB could further ease the conditions of the TLTROs at the December meeting. For instance, it could further reduce the cost, and increase the amount banks can borrow.