07/31/17

GDP Nominally Missed Raised Expectations

By: Kent Engelke | Capitol Securities

Some were expecting a three handle for second quarter GDP. As widely published, the economy expanded at a 2.6% annual rate which did not meet raised expectations of 2.7%. Consumer spending met analysts’ views helped by rising jobs and home prices.

Speaking of homes, residential investment fell by the most since 2010, the largest hindrance to growth. The reasons for this large decline is actually bullish… builders are coping with a shortage of available labor and lots.

Business investment in equipment rose by 8.2%, at the greatest rate in two years. This data point is significant as it bodes well for potential gains in productivity. The overall nonresidential investment eased nominally, the result of a slowdown in the boom for oil and gas wells.

The inflation data indicated that pricing pressures are benign even though the core PCE, which is ex-food and energy, was nominally higher than forecasted.

After tax incomes adjusted for inflation rose at a 3.2% annual rate, the most in two years, after a 2.8% gain in the previous period.

Is the economy at the edge of “escape velocity?” On the surface, the data suggests this point is still elusive. However, I will argue that it will not take much to push the economy to this pivotal point. Some will argue the dysfunction in Washington will not permit such acceleration. I take a different stance… Washington via its tax and regulatory agenda has been a major hindrance to growth. A reprieve from such is a positive, thus market neutral. Any reform will be very market friendly.

Speaking of the markets, the tech heavy NASDAQ was at one time down 1% as a mega-capitalized technology issue missed expectations, but the index retraced the vast majority of its losses to close about 0.15% lower. The Dow was also mixed as one energy leviathan met profit expectations, while another fell nominally short, the result of declining production.

Speaking of crude, oil had its biggest weekly advance this year—up about 8% — amid signs of stronger demand and falling supplies. According to the EIA, the nation’s fuel use in June surged to the highest for that month in a decade.

What will occur this week? The earnings deluge continues. Moreover, it is a heavy data week, data that includes the ISM, the ISM non-manufacturing index, construction spending and auto sales, concluding Friday with the release of July’s employment report.

And then there are the headlines. Will Venezuela become a significant event, especially as it relates to oil? The international pressure upon this socialist country is intense, pressure from Washington to Russia to China, with the latter making demands for debt repayments that probably will not occur and the former regarding human rights and a bogus election.

Depending upon the source, Venezuela is the fifth or sixth largest exporter in OPEC, exporting about 2.25 million barrels a day exports that are already forecasted to drop between 250,000 to 400,000 barrels a day by fall because of the lack of infrastructure spending and social unrest. Will a massive humanitarian crisis develop and if so, what are the implications? Infinite.

Last night the foreign markets were up. London was up 0.29%, Paris was up 0.14% and Frankfurt was up 0.27%. China was up 0.61%, Japan was down 01.7% and Hang Sang was up 1.28%.

The Dow should open flat ahead of heightened geopolitical tensions, including the sham vote in Venezuela, North Korea and heightened tensions in the Middle East between former Sunni allies and increased violence in Jerusalem. The 10-year is unchanged at 2.29%.