By: Kent Engelke | Capitol Securities
The headline number for fourth quarter GDP disappointed. The economy expanded by 2.6% as opposed to the 3.0% expected rate. The reason for the shortfall was a huge drag from inventories and trade. Final sales to domestic purchasers, which exclude trade, grew by 4.3%, the fastest pace in over three years.
Consumption growth was close to 4.0%, while fixed investment rose by almost double, helped by another double digit gain in equipment investment.
Inventories subtracted about 0.7% versus an expected gain of 0.2%. This can be interpreted as bullish. Stores were depleted not increased, thus suggesting production will have to accelerate in the coming months to replace spent stores.
Regarding trade, net exports were also a big drag on growth as a 6.9% rise in net exports was overwhelmed by a 13.9% surge in imports. As stated Friday, global growth is surging and a strong argument can be made it is the US that is the proverbial engine of this global growth.
It must be remembered that trade and inventories are volatile and historically are revised in the coming months.
In my view, the data does little to challenge the underlying strength of the economy, growth that should accelerate as tax cuts and bank reform begin to positively impact the economy.
Changing topics, President Trump addressed Davos. In many regards it was a nonevent.
Commenting about the markets, the dollar resumed its decline, oil rose again and stocks were higher because of earnings. Treasuries also rose in yield with the 2-year Treasury rising to a 2.12% yield, or the highest yield in 9 years.
What will happen this week? Earnings reports will continue to accelerate including releases from the largest technology companies. There is also a Fed meeting where no change in interest rates are expected. And then there is the State of the Union address (SOTU). How will it be received?
Last night the foreign markets were mixed. London was up 0.21%, Paris was up 0.07% and Frankfurt was down 0.03%. China was down 1.56%, Japan was down 0.01% and Hang Sang was down 0.56%.
The Dow should open moderately lower as the bond market is selling off again partially upon the BOJ’s comments that inflation is “hardening.” The 10-year is off 15/32 to yield 2.72%.