Divergence has been the key theme for 2018, but the U.S. looks poised to slow down and this should alleviate stress in global asset prices being pressured by the strong dollar and rising interest rates. U.S. GDP growth was 3.5% for Q3 based on the second reading from the Bureau of Economic Analysis. Business spending and inventories were revised higher while exports and consumer spending (from 4% to 3.6%) were revised lower. Q4 GDP growth is expected to be in the range of 2.5-3%.
Employers added 155,000 new jobs to the economy in November and this was below the 198,000 estimate. The unemployment rate held steady at 3.7% and the prior two months reports were revised lower. Job gains continue to sit at healthy levels although everyone is laser focused on wage growth. Wages grew 3.1% year-over-year and this was slightly below expectations. Higher wages have started to impact margins and profitability at corporations which are already dealing with uncertainty over trade/tariffs and a deceleration in the rate of earnings growth.
Inflation continues to soften based on the latest readings. The PCE Index held steady at 2% in October while Core PCE fell to 1.8% from the prior month’s reading of 1.9%. CPI, which doesn’t factor in substitutes, fell from 2.5% in October to 2.2% in November, led by falling gasoline prices. Core CPI increased slightly in November to an annualized rate of 2.2% (from 2.1% in October). Inflation remains very much in check based on both popular gauges and this should allow the Fed to pause its rate hiking cycle and take more of a data dependent or measured approach. Fed comments have become more dovish in recent weeks and a pause seems increasingly likely to digest weakening economic data, especially in interest rate sensitive sectors like housing and autos. The Fed has raised rates 8 times during the current cycle and there is a 78% chance of a 9th hike in December.