Date: September 27, 2018
U.S. Economy Grew at Unrevised 4.2% Pace in Second Quarter
The U.S. economy grew in the second quarter at an unrevised 4.2 percent pace, the fastest since late 2014, indicating a solid foundation for this quarter, Commerce Department data showed Thursday. The revisions for GDP, the value of all goods and services produced in the U.S., are largely in sync with more recent data that show the world’s largest economy is expanding at a steady, albeit more moderate, pace this quarter. The details were mixed. Inventories subtracted 1.17 percentage point from growth, revised from a previously reported 0.97-point drag, mostly on nonfarm stockpiles. Household purchases, which account for about 70 percent of the economy, remained the main driver of growth. They contributed 2.57 point, up from a previously estimated 2.55 point. In addition to tax cuts signed by President Donald Trump, a robust job market is helping consumers while strong profits are supporting corporate America. The steady growth rate will offer the White House further opportunity to claim credit for the robust expansion. At the same time, a trade war with China has triggered higher tariffs on imports, supply-chain disruptions, and uncertainty about when the trade tensions may be resolved. Borrowing costs will continue to tick up; the Federal Reserve, which lifted interest rates Wednesday, said growth and job gains have recently been “strong” as it projected further rate hikes over the next year. The Atlanta Fed’s GDPNow tracking estimate for third-quarter growth was at 4.4 percent as of last week, while the median forecast in a Bloomberg survey of economists showed a 3 percent pace. Price data in the report showed inflation is moving in line with the Fed’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index that is tied to personal spending rose at a 2.1 percent annualized rate, revised from 2 percent.
German Inflation Unexpectedly Accelerates to Four-Month High
German inflation unexpectedly accelerated to a four-month high, suggesting the rate in the euro area will rise further above the European Central Bank’s goal. Consumer prices rose an annual 2.2 percent in September, exceeding the median estimate in a Bloomberg survey and the 1.9 percent reached in August. Eurostat will release data for the 19-nation euro region on Friday, after reports from France and Spain. The euro rose slightly after Thursday’s numbers and traded at $1.1706 at 2:15 p.m. Frankfurt time. Inflation in Germany has been slightly stronger than in the currency bloc in recent years, supported by a robust labor market and solid domestic growth. The latest pick-up — boosted by rising energy costs — is likely to add to discontent in Europe’s largest economy about continuously loose monetary policy and amplify calls for higher interest rates. Under a national measure, inflation in Europe’s largest economy stood at 2.3 percent in September, the highest level in almost 7 years. Governing Council member Ewald Nowotny of Austria has already said the ECB should consider tightening policy sooner than originally planned. While the ECB expects to end asset purchases in December, officials have signaled borrowing costs won’t rise until after the summer of 2019. “The inflation rate in Germany is now above the inflation goal of the ECB,” Clemens Fuest, president of the country’s Ifo institute, told Bloomberg. “If this trend is confirmed for the euro area as a whole, the ECB should announce that interest-rate increases can happen earlier than currently planned.”
Emerging Asia Builds on Defenses in Fed-Led Tightening Cycle
Asia’s worst-hit emerging markets moved on Thursday to protect their economies against growing threats from Federal Reserve tightening, a strong dollar, and escalating U.S.-China trade hostilities. Following the Fed’s interest-rate increase Wednesday, Bank Indonesia raised rates for a fifth time this year, to 5.75 percent from 5.5 percent, while the Philippines delivered another strong hike of 50 basis points to 4.5 percent. In a busy day for regional central banks, New Zealand and Taiwan held their policy stances, while flagging growth risks from the trade conflict. In India, authorities took steps to support lenders and curb the rupee’s slide. Indonesia has been among the hardest-hit of Asia’s emerging markets this year, erecting numerous defenses to protect a currency that’s weakened about 9 percent against the dollar since the start of 2018. In the Philippines, central bankers are pushing back against inflation that’s surged well beyond the top of their target range. For both, and for central bankers the world over, policy and trade risks emanating from the U.S. are offering more reasons to tighten and to work to fend off capital flight, not to mention strengthening oil prices. Hong Kong’s central bank also raised its benchmark interest rate on Thursday to 2.5 percent from 2.25 percent, in line with the Fed’s move. Governor Perry Warjiyo cited a need to “further strengthen Indonesia’s external resilience amid the current global uncertainties that are still high,” naming Fed policy normalization and trade tensions specifically. “Bank Indonesia will not be hesitant to control or guard the stability of the exchange rate,” he said.