Week in Review: US Growth Revised Modestly Higher

Review of the week ended 30 September 2016

  • Q2 US GDP revised up
  • Sentiment improves in Eurozone
  • Oil producers outline potential production cap
  • Italy sets December date for reform referendum
  • US Congress agrees on government funding deal

Global equities were little changed on the week as the markets digested a rally in oil prices and an increase in concern over the health of Germany’s largest lender. Firmer Q2 US growth and signs of improvement in Q3 were positives. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, rose to 13.9 from 12.3 a week ago. Oil prices were lifted by hopes of an OPEC production cap, with West Texas Intermediate crude rising to $47.90 per barrel from $46.25 last week while global Brent crude rose to $48.90 from $47.75. The 10-year US Treasury note yield fell to 1.56% this week from 1.62% a week ago.

GLOBAL ECONOMIC NEWS

US growth revised slightly higher
Economic growth in the second quarter was revised slightly higher by the US Bureau of Economic Analysis. Gross domestic product expanded by a revised 1.4%, up from an earlier 1.1% estimate. Early indications are that growth picked up further in the third quarter, with estimates by the US Federal Reserve banks of New York and Atlanta averaging 2.5% for the quarter, which ends today.

Sentiment in Europe improves as Brexit shock fades
Economic sentiment improved in the eurozone this month as the shock of the United Kingdom’s Brexit vote faded. The economic sentiment index rose to 105.9 in September from 103.5 in August. In Germany, the Ifo business confidence index reached 109.5, the highest level since May 2014. The index stood at 106.3 in August.

Oil producers agree on need for cut, but give few details
OPEC members agreed to the need for a production cap to help reduce a surplus in the global crude oil market but revealed few specifics ahead of a meeting in November. It is expected that production will be trimmed between 500,000 and 750,000 barrels per day from the August level of 33.2 million barrels per day. What is unclear is which member countries will be exempt from production cuts. Given OPEC’s history of failing to adhere to production quotas, markets remain skeptical.

Italy to vote in December on constitutional reforms
Italy’s constitutional reform referendum will take place on December 4. The proposed reform would limit the power of Italy’s Senate and lead to greater government stability, its backers say. Prime Minister Matteo Renzi has said he will resign if the reforms are rejected, so the referendum is potentially as much a referendum on Renzi’s stewardship of the anemic Italian economy as it is on reforming government institutions. Given the populist wave that is building in Europe — and elsewhere — an outcome favorable to the sitting government is far from assured.

US Congress passes funding package
With days to spare, US lawmakers approved a continuing resolution that will fund the government through 9 December. The US government’s fiscal year draws to a close at midnight tonight.

Global trade lags GDP growth for first time in years
Global trade is growing slower than the world economy for the first time in 15 years, the World Trade Organization reported this week. The WTO sees trade expanding at a 1.7% rate this year, while global GDP is expected to expand by 2.2%. WTO Director-General Roberto Azevêdo warned that the slowing of trade is a serious wake-up call, particularly in the context of growing anti-globalization sentiment.

Draghi defends ECB before Bundestag
European Central Bank president Mario Draghi defended the central bank’s monetary policy in an address before the lower house of the German parliament. “Through our efforts to bring inflation back towards 2%, we have contributed to higher growth and the creation of more jobs. In Germany, exports are benefiting from the recovery in the euro area, unemployment is at its lowest level since reunification, people's take-home pay is increasing noticeably, and venture capital is pouring into Berlin's silicon alley,” he said.

European banks under pressure
Shares of Germany’s Deutsche Bank were pressured this week by a looming legal settlement with the US government over mortgage-backed securities sales during the mid-2000s housing bubble. The bank’s woes helped push the yield on the 10-year German bund to -0.15%, the lowest since July. Negative interest rates in Europe are pressuring the sector as a whole, leading two large European lenders, Commerzbank and ING Groep to announce large layoffs this week.

GLOBAL CORPORATE NEWS

“Megabrew” deal approved
Shareholders of AB InBev and SABMiller approved the £79 billion merger of the two giant brewers. The combined entity will produce roughly 30% if the world’s beer.

Sounds like a deal…
Streaming music platform Spotify is reportedly in advanced talks to acquire rival streaming service SoundCloud. The two services have somewhat different business models. Spotify relies mainly on content from major music labels while SoundCloud’s content is owned largely by the content’s creators, giving it somewhat larger profit margins than Spotify.

THE WEEK AHEAD

  • Global manufacturing purchasing managers’ indices are reported on Monday, 3 October
  • Global service sector PMIs are reported on Wednesday, 5 October
  • The minutes of the European Central Bank’s September meeting are released on Thursday, 6 October
  • The September US employment report is released on Friday, 7 October

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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