The U.S. economy continued to turn in solid numbers; Norway made a surprising proposal; UK retail showed pre-Brexit jitters; India got an upgrade
"I’m struggling to see how we’ll reach an agreement quickly."
U.S. growth: Solid week This was a difficult week for doubters of U.S. economic progress. Producer and consumer prices, ex-food and energy, rose 2.4% and 1.8% respectively;1 capacity utilization rose to 77%, also beating expectations. Housing starts rose to a 1.29 million annualized rate, also beating expectations and auguring well for Q4 growth. With the labor shortage in housing construction growing more acute, wage growth could be expected to follow. Business inventories were flat in September but total sales rose 1.4%, suggesting that sales outran inventory replenishment– and that production will have to increase in order to keep up.
However, the U.S. Treasury yield curve, continued flattening, sounding a cautionary note; at week’s end, 30-year yields moved down nearly 10 basis points to 2.783%, while 10-year yields dropped a bit less than 6 basis points to 2.34%. In an environment where inflation has appeared to be rebounding, this move sowed a few seeds of doubt. But the Fed Funds futures rate appeared not to share in the concern; the odds of a rate hike at the December 13 FOMC meeting remained solidly strong at 92.3%.
Norway: Canary in the oil field? Norway’s $1 trillion sovereign wealth fund is the world’s largest investor in equities, so its proposal to sell off its entire $35 billion holdings in the stocks of oil companies in order to diversify away from fossil fuels was big news – and not just for proponents of sustainable investing. The rationale is the need for diversification of risk; Norway’s overall economy is highly dependent on its own oil production. The move wouldn’t be sudden; it’s believed that the proposal will take a year to gain approval.
UK retail: Less than merry October saw retail sales fall 0.3% from a year ago, the first such fall in more than four years. Not counting fuel, October sales rose just 0.1% from September, which itself saw a 0.6% month-over-month decline. Though possibly a reaction to the month’s 3% growth in consumer prices, the worry is that consumers could begin to pull back from the Christmas shopping season due to doubts about Brexit’s impact on their own household budgets.
India: Thumbs up from Moody’s Rating agency Moody’s upgraded India’s’ sovereign debt to Baa2 from Baa3 – from the lowest to the second lowest investment-grade rating. This brought the rating to the highest level since 1988 and was seen by many as an endorsement of Prime Minister Narendra Modi’s efforts at financial reform. The timing attracted attention, since the government has been dropping hints that it would ease its own budgetary goal “glidepath” toward an eventual budget shortfall of only 34% of GDP in 2019. The news sent India’s Sensex equity index up over 2.5% and was seen as especially favorable for the financial sector.