4Q Growth Expectations Crashing: A Tailwind for BondsNovember 15, 2019
Today’s US economic data releases have sent growth expectations plunging for fourth quarter GDP. First, retail sales ex-autos and gasoline rose only .1% in October, well below the .3% expectation. Second, industrial production fell twice as much as expected in October, dropping -.8% compared to the expected drop of -.4%. Along with industrial production, we saw capacity utilization fall to 76.7%, below expectations of 77.1%. Third, business inventories were flat in September, compared to expectations for a .1% build.
These data points hit several aspects of GDP expectations that are well illustrated with the Atlanta Fed GDPNow data. The retail sales miss can be seen in the declining estimate for personal consumption, now sitting at only 1.66% growth.
The industrial production miss caused the expectation for non-residential equipment growth to tumble to .46%.
Next, estimates for inventory growth in the fourth quarter are now negative in the wake of the business inventory miss.
Put all this together and we see that today’s economic releases brought estimates for fourth quarter growth down from 96bps yesterday to 31bps today. Since the beginning of October, as stocks have staged a strong rebound, growth estimates for the fourth quarter have melted away from about 2% to 31bps.
There are two related consequences to this plunge in economic data. One, our models show that inflation should continue to fall from levels that are already undershooting the Fed’s 2% target. The last time growth estimates were this weak, inflation fell basically to zero in 2015.
With falling inflation, breakeven inflation embedded in the 10-year US Treasury bond has scope to fall further.
We created a simple model where we lag 10-year US Treasury rates by 90 days. We’ve found that bond peaks and troughs line up historically around peaks and troughs in the GDPNow. The GDPNow peaked on August 21, 2019 at 2.31%. Bonds peaked on November 8, 2019… pretty close to our simple 90-day model.
Today’s across-the-board miss on all economic data fronts presents the opening for bonds to retest the 1.46% low hit on June 4, 2019.