Macro Commentary
Macro data this week further builds the case for the Fed to raise rates in the middle of December. The pace of economic expansion for the third quarter was revised higher to 2.1% versus the previous estimate of 1.5%. Businesses worked through inventory at a faster pace than previously thought, and importantly wages were higher. We continue to keep an eye on corporate profit margins as labor is a significant input into the service based US economy. As gasoline prices have remained low, we will see if the consumer feels comfortable ramping up spending as we approach the holiday season.
Meanwhile, next week the European Central Bank (ECB) will meet to discuss their policy options. The markets expect some substantial increases to the monetary stimulus that is currently in place. ECB President Draghi has signaled that they may take the deposit rate even further negative than they have already (-0.2% on deposits that banks have at the central bank). They may also seek to increase the pace of monthly bond purchases. The euro has continued its move lower as various ECB policy makers have commented in recent weeks and is around 1.06 euro for each US dollar. These actions have clearly impacted the bond market as Bloomberg estimates about one-third of Euro-area government bonds are priced to a negative yield. Time will tell if these extraordinary policies can be unwound as the economy revives. Our guess is that European policy makers might consider that a good problem to have.