Americans Exit Recession
The talk of the town yesterday was unequivocally the surprisingly
good Q3 Advance GDP data out of the United States. After three days of
weakness on pretty much every global equity market, investors were
looking for some reason to get back in, and yesterday, it seems, they
got one. After the GDP number was released at a better-than-expected
annualized 3.5% for the last quarter, officials in the US were declaring
themselves out of the year-long recession. This swift shift towards
growth was attributed to the successful implementation of government
stimulus programmes, such as the Cash for Clunkers initiative and the
Home Buyers Credit. And, as expected, bulls were back in the markets
with a vengeance after sitting out for the early part of the week.
Equities were up, with the NASDAQ closing the day up 1.84%, the S&P500
up 2.5%, and the TSX up a staggering 2.5%.
The attitude of the day truly was that risk is
back on the table, and currencies, taking their cue from equities, saw
the high-yielders taking back the ground given up over the course of the
week. Day’s end had all of the usual suspects up over a cent against the
USD as the markets charged into instruments offering higher returns.
This teeter-totter risk aversion/risk acceptance game has become the
convention as a “USD (and its sidekick, the JPY) versus everyone”
sentiment has entrenched itself in the minds of traders.
The markets were taking what they could get
yesterday, and the GDP figure was apparently all that anyone cared
about. There was, however, one other important piece of data yesterday,
less reported on, but nonetheless noteworthy—a skeleton in the closet,
one might say. The Unemployment Claims were out worse than expected at
530K last week versus a forecast 522K. It’s important to take into
consideration that the exceptional GDP number, which is a reflective
gauge, was achieved on the back of a host of government programmes that
are nearing (or have reached) the end of their cycles. With unemployment
growing and confidence down (as we learned earlier this week), what will
replace the contributions of these massive programmes? There is a
significant risk that other parts of the economic engine simply won’t be
able to pick up the slack when government stimulus is removed from the
equation. It seems unrealistic to place so much confidence in this
number—especially so early on—which, let us not forget, is open to
revision. This return to growth is tenuous at best, as there is every
possibility that over the coming months, as the effects of stimulus
programmes being phased out ripples through the economy, actual growth
will be muted. And the worst case scenario is that a return to a
contracting economy isn’t totally out of the question. These are shaky
times, and those governments that provided so much crucial support to
the global economy in its time of need must be careful not to destroy
all of their hard work by drawing back that helping hand too quickly.
Canadian Q3 GDP Surprises
Canadian month-over-month GDP was out this morning, and unlike our
neighbour south of the 49th, our economy is still shrinking. The month
of August saw an unexpected -0.1% contraction versus a projected growth
of 0.1%. The decline was attributed to a retreat in natural resource
extraction as well as poor manufacturing and wholesale trade. This
heralds a return to negative territory after July’s flat GDP reading.
BoC governor Mark Carney must be breathing a sigh of relief this
morning, as yesterday it looked like all his talking down of the
Canadian dollar was for nothing. The poor GDP result, along with
Carney’s posturing over the last two weeks, looks to be giving all the
C$ bulls a moment’s pause this morning. After the data release, the
Loonie was immediately off of its high reached overnight. While still
contained inside of the weekly range, the unit is down against the
broader market this morning and, at the time of writing, knocking on
1.0800’s door against the USD. It looks like the CAD will end the week
on a defensive note.
Don’t forget Daylight Savings Time is this
Sunday in both Canada and the US.
Have a great weekend, and HAPPY HALLOWEEN!
By David Starkey, FX Trader
Send a message
