US GDP grew over the third quarter and it's been a largely positive week across equity markets. Read on to see how the last week has unfolded.
US GDP rebounds in Q3, inflationary pressure remains
US gross domestic product grew 2.6% over the third quarter, beating consensus estimates of 2.4% on an annualised basis. The increase follows two consecutive quarters of negative growth, often an indicator for a recession. Whilst this growth has largely offset the contraction in the first half of the year, there remain concerns that a recession is likely to come next year.
Looking into the figures, whilst consumer spending continued to rise, it did so at a slower pace. However, saving rates remain higher than normal despite price rises depleting them, so consumer spending may remain robust. Real residential investment spending saw a sharp contraction for the second quarter as higher interest rates impacted the housing market.
The main driver of the GDP growth was net trade. Exports increased, highlighting the contribution of energy exports to counter shortages due to sanctions on Russian gas deliveries to the EU. At the same time, the easing in supply chains and growing inventories saw a fall in imports.
Looking at data from the Atlanta Fed Wage tracker, often seen as key leading indicator, wage increases may have started to peak. However, the mismatch between job openings and appropriate skilled workers, still means that current growth is around 5%, higher than the Federal Bank’s (Fed’s) target. This is likely to be made worse as a stalling housing market reduces worker mobility.
The Fed meets on 2 November and is widely expected to raise rates by 0.75%. However, comments from the Monetary Policy Committee (MPC) members have started to hint at the need to pause rate rises once they have reached a sufficiently restrictive level.
ECB raises rates by 0.75% and delays quantitative tightening
The European Central Bank (ECB) has raised rates by 0.75%, taking the main deposit rate to 1.5%, in line with expectations. This marks the second such rate rise following a decade of 0% or negative rates.
In what some are interpreting as a dovish stance, ECB President Christine Lagarde noted that whilst further rates will be needed to combat near double-digit inflation, much monetary tightening has already been done and that recent economic data highlights the downside risks for economic growth, which would have a further disinflationary impact. The ECB has also opted to delay quantitative tightening and to change its targeted longer-term refinancing operations (TLTRO) terms to encourage commercial banks to repay loans early.
It was a largely positive week across equity markets, with the MSCI World index up over 3% by the end of the week. In the US and Europe, the S&P 500 and EURO STOXX indices ended the week up 4%. Earnings announcements painted a mixed picture. Social media giant Meta – Facebook’s parent company – sold off once again as capital expenditure continues to rise to fund the development of the metaverse. In contrast, oil companies such as BP continued to announce bumper profits.
UK bond markets continued their recovery, with the UK Gilt index ending the week up over 5% as yields lowered.
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