US GDP growth reaching 5% in Q3 raises lots of questions. Are things finally getting better? Is the economy reaching breakout speed? Is Fed tightening now on our doorstep? Is this the beginning of a sustained upward trend or the apex of our economy before we get dragged down by global conditions?
The chart below shows quarterly GDP growth since the financial crisis. After struggling near 2% annualized growth for many years, the last five quarters make it appear that the economy has shifted gears. This in the face of a sputtering global landscape. It's also rather remarkable that we are seeing growth without inflation ... truly a Goldilocks environment, but how long will it last?
This week's GDP figure caused a severe pullback in Treasuries. In the blue circle below you can see the massive spike in the 10-year yield as Treasury prices sold off. Rising interest rates reduce the value of existing bonds and it appears many investors interpreted the GDP data as implying that we may soon see rates ratchet higher.
The move in Treasuries was large in magnitude but I don't see a high likelihood of it being sustained. At least not until we see a pickup in the global economy. Treasuries are heavily in demand as yields remain higher in the US than in many other parts of the world. The current 10-year US Treasury yield near 2.3% compares with Japan's 10-year at 0.34% and Germany at 0.6%. Even if the Fed were to begin raising the short end of the curve, it's likely the long end would remain suppressed as a result of global demand. Treasury buyers are also receiving the added advantage and incentive of a strengthening dollar.
In other market news, the US Energy Information Administration said that US oil supplies surged again for the week ended December 19th. This followed on the heels of a note from the American Petroleum Institute showing a rise in crude-oil supplies. Both these developments are putting more downward pressure on oil, but the mark for Light Crude is still holding.
Weekly jobless claims continued to support strength seen elsewhere in the labor markets. The number of layoffs last week was only marginally higher than the 14-year low hit in October. Jobless claims are a great leading indicator and they continue to remain at very healthy levels.
I mentioned earlier this week that major round numbers on market indexes often have a gravitational effect when they are crossed. Data from Schaeffer's Investment Research puts some numbers to this claim. According to their research, over the last 15 years whenever the Industrials crossed a 1,000 point interval, they averaged a 0.19% drop the following week, a 0.29% drop over two-weeks, and a 0.2% drop over the following month. It seems the market needs a settling period to adjust to the new levels before moving higher. Schaeffer's data also shows that three months after crossing a 1,000 point interval the index averages a 2.1% gain. So we may see some short-term hesitation, but with numerous tailwinds at our back, prices are likely to resume their ascent.
The above content was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
