Stocks traded higher this morning before flattening out through noon. Bulls were temporarily able to shake off Meta’s (NASDAQ: META) disastrous earnings, reported last night, but sagging tech shares eventually dragged the general market into the red.
The S&P fell slightly while the Nasdaq Composite endured a moderate loss. The Dow, meanwhile, held on to a small gain.
The market’s initial optimism was caused by a combination of sliding yields, dovish demands from a Democratic senator, and a surprisingly strong GDP report. The 10-year Treasury yield fell below 4.00%, lifting significant bearish pressure off stocks.
But it was Sen. John Hickenlooper (Colorado-D) who really whipped up bullish enthusiasm with a letter sent to Fed Chairman Jerome Powell. Hickenlooper called on Powell to “pause and seriously consider the negative consequences of again raising interest rates” at the next Fed meeting.
“The Fed’s bluntest tool [to fight inflation] is interest rate increases, and it has wielded that hammer repeatedly. However, after five straight rate increases by the Fed, I worry any additional action will undermine economic growth and harm American families,” Hickenlooper wrote.
Bulls obviously loved this, and stocks rallied in response.
His message lost much of its sting, however, after the US GDP numbers for Q3 were released. The Bureau of Economic Analysis (BEA) reported this morning that the US economy grew by 2.6% in the third quarter, beating the consensus estimate of 2.4% while notching the first quarter of positive growth this year.
Investors have been looking for data suggesting that the US isn’t headed for recession. Today’s GDP report, when taken at face value, seemed to provide that in spades.
But the details of the report painted a very different picture. Last quarter’s GDP beat was driven entirely by net exports, which contributed 2.77% to Q3’s growth. That’s 108% of the headline number.
Exports surged due to the US’s support of the European war economy. Commodity (oil and gas) exports hit an all-time high as weapon exports erupted, too.
Personal consumption, meanwhile, added only 0.97% to Q3 growth, hitting a low unseen since 2019. Private inventories and fixed investments both subtracted from the GDP figure, -0.70% and -0.89%, respectively.
So, in other words, the war in Ukraine was largely responsible for last quarter’s sizable GDP gain. Removing exports from the GDP calculation would have resulted in negative (-0.17%) growth. A weak GDP deflator reading helped boost the real GDP reading as well.
“Thanks to a much lower than expected price deflator, real Q3 GDP beat estimates with a 2.6% increase vs the estimate of 2.4%,” said Peter Boockvar of Bleakley Financial Group.
“Looking at nominal growth, the estimate was 7.7% and we got 6.7%. Thus, if the price deflator came in as expected, the Real GDP print would have been 1.4%.”
The Financial Times went so far as to say that today’s GDP growth release “ends a debate that raged over the summer as to whether the US economy was already in a recession.”
That’s obviously untrue given that the GDP beat was a result of the ongoing European economic collapse, not strong economic activity stateside. Europe needs American gas and weapons more than ever. The recent strike on the Nord Stream pipeline made sure that America would be Europe’s sole supplier of gas.
Thankfully, Capital Economics economist Paul Ashworth provided investors with a sobering take on the situation this morning.
“Overall, while the 2.6% rebound in the third quarter more than reversed the decline in the first half of the year, we don’t expect this strength to be sustained,” Ashworth wrote.
“Exports will soon fade and domestic demand is getting crushed under the weight of higher interest rates. We expect the economy to enter a mild recession in the first half of next year.”
He’s absolutely right in saying that Q3’s GDP gains should be looked at as a temporary blip higher instead of a developing trend. That, coupled with the recent batch of ghastly tech earnings, should give the Fed an “out” if it wants to reduce the size of its next few planned rate hikes.
