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October
26
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Week In Review

GDP

Third quarter GDP grew at a 3.5% annualized pace.  Personal consumption rose 4.0%, gross private investment rose 12.0% (driven primarily by an increase in inventories), and government spending increased 3.3%.  Imports were up 9.1%, while exports fell 3.5%.  The GDP price deflator rose 1.7%.

Our Take

3.5% GDP growth looks solid, especially with consumption up 4%.  In addition, the GDP deflator points to well contained inflation.  Along with the good news, there are some worrisome parts of the report.  Trade reduced GDP substantially, as net exports were decidedly negative and this loss was offset by a build-up in inventories.  U.S. companies may have imported more than normal ahead of increasing tariffs, meaning consumption will need to remain strong in subsequent quarters to reduce inventories and continue the recent trend of strong economic growth.


Italy

Italy released the details of its proposed 2019 budget, and the EU commission rejected the budget and sent it back to Italy for revision.  DeMaio and Salvini again stated their commitment to delivering on campaign promises, and Prime Minister Conte stated that there is “no plan B” for Italy’s budget.  Spreads on Italian government bonds relative to bunds widened to the highest levels since 2012.

Our Take

The EU and ECB are not downplaying the conflict with Italy and are hoping that the bond market will impose fiscal discipline on Italy.  The danger of this strategy is that a banking and fiscal crisis brought on by bond investors plays into the populists’ hands and makes the threat of Italy defaulting or leaving the Euro more credible.


China

Chinese GDP and industrial production growth slowed more than expected in the third quarter.  The Chinese markets showed signs of government directed buying to stem sharp declines.  The government and the PBOC announced support measures to stabilize markets, ease funding pressures and stimulate consumption.

Our Take

The Chinese economy continues to decelerate and to feel the impact of rising trade tensions.  This slowing is pushing back efforts to de-leverage the Chinese economy and reduce financial risks.  A Chinese economic slowdown would also pressure global growth.


Municipals

Moody’s Investors Service downgraded Vermont’s general obligation bond rating from Aaa to Aa1 this week.  Moody’s cited “an economic base that faces low growth prospects from an aging population.”  State Treasurer Beth Pearce stated that Vermont will focus on regaining the Aaa rating by working with lawmakers to “improve the economic prosperity of all Vermonters.”

Our Take

Vermont is facing not only an aging population but also unfunded pension liabilities.  This week’s downgrade has put pressure on lawmakers to improve the state’s fiscal health and address the state’s pension liabilities.  Even though Moody’s lowered the state’s rating to Aa1, Vermont is still the highest rated state in New England.