REPORT
By Gülbin Yıldırım
U.S. letter, week beginning Oct. 31

- The U.S. economy gained pace in Q3

Growth data for the 3rd quarter was among the most important economic developments last week. According to preliminary data released on Friday, U.S. GDP expanded by 2.9 percent in the 3rd quarter - the fastest growth rate in the last two years. Consumer spending and exports were the headliners of faster GDP growth which topped the market expectation of 2.5 percent.

The strong GDP data increased the likelihood of a Fed rate hike in December, and following the release of the report, market expectations further strengthened the possibility to over 70 percent by the year end.

Other positive data came from the manufacturing, services and construction sectors. The flash manufacturing PMI showed a sharp acceleration in activity by increasing almost 2 points to 53.2 - the strongest growth rate since October last year. The flash services PMI was also up nearly 3 points to 54.8 for the strongest rate of composite growth this year. Both indices exceeded market expectations and signaled a strong quarter. Finally, existing home sales for September rose 3.1 percent while the expectation was a 1.5 percent decline.

Nonetheless, consumer confidence indicators drew a more pessimistic view due to uncertainty surrounding the upcoming presidential elections. According to the University of Michigan Consumer Surveys, consumer sentiment weakened substantially in October, ending the month at a lower-than-expected 87.2. The conference board's Consumer Confidence Index also fell nearly 5 points to 98.6.

Moreover, durable goods orders recorded their first decline in three months, decreasing 0.1 percent in September.

 

- Fed officials remained silent

Fed officials stayed out of the media for most of last week, as is their custom the week before an FOMC meeting. However, the blackout starting Tuesday, did not stop a few Fed officials from speaking on Monday.

“The Fed may need to keep interest rates lower for longer to convince investors and the public that the Central Bank is serious about reaching its 2 percent inflation target,” Chicago Fed President Charles Evans suggested in a speech in Chicago on Monday.

St. Louis Fed President James Bullard repeated his view that a single 25-basis-point increase before the New Year is necessary.

“On the other hand, low rates are likely over the next two or three years because the rate of return on safe assets when adjusted for inflation, has been 200 basis points lower in recent years as compared with the 2001-2007 expansion,” he said.

 

- The FBI reopened investigation into Clinton emails

The FBI’s reopening of its investigation into Clinton’s emails days before the U.S. Presidential Elections was among the most important developments last week.

In a letter to Congress on Friday, the FBI Director James Comey said, "In connection with an unrelated case, the FBI has learned of the existence of emails that appear pertinent to the investigation."

"I am writing to inform you that the investigative team briefed me on this yesterday [Thursday], and I agreed that the FBI should take appropriate investigative steps designed to allow investigators to review these emails to determine whether they contain classified information, as well as to assess their importance to our investigation," he continued.

Stocks, which had been up after the government said the economy grew last quarter at its fastest pace in two years, closed lower Friday after Comey's letter caused a small scale earthquake, introducing fresh uncertainty into the presidential race.

Last week, large companies' earnings reports also played an important role in U.S. markets. Apple, Alphabet, Amazon, Twitter, Exxon and GM were among the market-movers.

- New week: FOMC, inflation, employment

This week, the FOMC meeting will be the top item on the economic and financial agenda. The Fed's policy decision will be announced on Wednesday.

Even though Fed officials insist that their November meeting will be like any other Fed meeting, the Fed could use its post-meeting statement to prepare investors for a rate hike in December.

On Monday, the Commerce Department will publish its personal income and spending report for September. The report includes the Fed's preferred inflation figure - the personal consumption expenditures price index.  A strong gain in income and spending and in inflation will increase the likelihood of a December rate hike, which is already estimated at 70 percent.

Markets will also closely monitor developments on the new FBI investigation into Clinton’s e-mails.

31 Oct,2016

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