The Day Ahead: Advance Q3 GDP, Consumer Sentiment, Chicago Business Barometer

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Ahead of a deluge of data, domestic interest rates are improved. This follows the release of several discouraging reports on the international economy in the overnight session.  The key report this morning is a first-look at third-quarter GDP. Even if results are better than anticipated, a range of overseas data points could mute a positive response.

S&P 500 futures are down 4.50 points to 1,174.75 and Dow futures are trading 30 points lower at 11,019. 

The 30 year bond is +16/32 at 97-12 yielding 4.03%. The benchmark 10 year note is +4/32 at 99-24 yielding 2.654%. The December delivery FNCL 3.5 is +0-04 at 100-10. The FNCL 4.0 is +0-03 at 102-24.

The US$ index is stronger by 28 basis points to 77.59 this morning. Commodity prices are mostly lower with light crude oil off 0.47% at $81.79 per barrel. But gold prices continue to climb and currently trade +0.40% at $1,348.85 per ounce.

“There was a slew of Japanese economic data released overnight, and it was almost all bad news,” said economists at BMO Capital Markets. They noted that a key manufacturing index for October fell 2.3 points to 47.2, “indicating a quickening contraction,” while industrial production for the month before plunged 1.9%.

In Europe, September’s jobless rate remained at 10.1% for the fifth straight month, and inflation in the euro zone accelerated to 1.9% year-over-year.

“Underlying price pressures in the region remain quite muted, though the hawks on the ECB ― Weber in particular ― will surely start sounding inflation alarm bells if prices rise any faster,” BMO analysts wrote.

Q3 earnings to be released include energy giant Chevron, plus Weyerhaeuser, Consol Energy, Arch Coal and Dominion Resources.

Key Events Today:

8:30 ― The first round of GDP results for the third quarter is expected to show the economy grew at a 2% annualized rate the past three months, a bump up from the 1.7% reported in the final reading for Q2, but far below the 3.7% rate from Q1. Forecasts from economists surveyed by Reuters ranged from 1% to 3.6%.

Housing is a major reason why growth is anemic ― investment in the residential sector could drop 25% in Q3 following a stimulus-backed+25.6% climb in Q2.

“The single largest contributor to growth in Q3 will be consumer spending,” said economists at the Bank of Tokyo Mitsubishi, expecting to see spending rise 2.3% compared with 2.2% in Q2. They said the low growth “reflects continued household restraint in spending as overall jobs were shed over the quarter and households continue to pay down debt, which has held the personal savings rate high.”

Economists at IHS Global Insight predict that foreign trade will once again drag down growth as imports outpace exports.

“The trade drag should be roughly offset by another surge in inventory accumulation, partly reflecting rising imports,” they added. “Overall, the report should show the economy remaining on a sluggish growth path, giving the Fed no reason to change its mind about the quantitative easing that seems on the way on November 3.”

9:45 ― The Chicago Business Barometer, a regional index of manufacturing and services, is expected to continue growing at a fast clip in October, but at levels slower than the prior month. The consensus of economist expectations looks for a 57.6 score, down from 60.0 a month before. Any score above 50 indicates growth. 

In contrast to the expected slowdown, the Empire State and Philadelphia Fed indexes improved in October. 

“Watch for another increase in the report's prices paid component,” said economists at Nomura. “Higher commodity prices have been lifting these measures, as well as the crude and intermediate PPI indexes.”

10:00 ― The revised reading for the Reuters / U of Michigan’s Consumer Sentiment is expected to be little changed from earlier in the month. The index fell to 67.9 two weeks ago from 68.2 in September, and is now expected at 68.

“We think higher stock prices and reduced downside risks to growth should lead to a moderate boost to the index,” said economists at Nomura. “The Michigan report's measure of inflation expectations remain a key focus. The 5-10 year expectations have been roughly stable.”

Economists at IHS Global Insight say the expected increase is a result of the stock market. They predict current economic conditions will improve slightly while expectations will hold steady.