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Economic Update-Gross Domestic Product
The Bureau of Economic Analysis (BEA) provided its preliminary estimate of 3rd quarter Gross Domestic Product (GDP). This estimate will be revised twice over the next two months. As it stands now, the BEA estimates that the US economy grew at a 4.9% pace. Clearly, not a pace that indicates that a recession is upon us at this time. Beneath the surface, there a clearly areas of concern.
Personal Spending
The consumer continues to be the engine driving the economy. Consumer spending grew at a 4.0% pace and consumer spending accounted for 55% of economic growth. Spending on services accounted for 60% of consumer spending while spending on goods was 40%. Within the services category, spending on housing and utilities was the biggest category of spending. Consumer spending contributed 2.69% growth of the total 4.9% growth.
Business Spending
Business spending account for 30% of GDP growth. This was dominated by an increase in inventories as inventories accounts for 90% of business spending. Spending on construction—commercial and residential—and intellectual property products was positive while spending on equipment declined. The net result was that spending outside of inventories accounted for 10% of total business spending. Business spending contributed 1.47% of the total 4.9% growth.
Government Spending
Government spending accounted for 16% of 3rd quarter economic growth. Within the government spending category, federal spending made up 49% of government spending and state & local spending made up 51%. Government spending contributed 0.79% of the total 4.9% growth.
Net Exports
Net exports subtracted from GDP growth and accounted for a negative 1% of the total GDP growth. Net exports subtracted 0.08% from the total 4.9% GDP growth.
Conclusions
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Interest rates took a wild ride as vaccine euphoria versus winter is coming might be the best title to describe this week for fixed income investors.
The week started off with positive news but in the world of bonds, good news is generally bad for bond prices as yields rise. For the first three hours on Monday morning, financial markets moved in a single straight line frenzy with long-term yields reaching their highest levels since March. The catalyst for this move was an announcement from Pfizer/BioNTech that they have produced a vaccine that is showing promising results in preliminary testing, preventing greater than 90% of COVID-19 infections. This was great news and markets got wrapped up in the possibility of getting our society and economy back to normal. But euphoria is giving way to reality as these benefits may be more of a 2021 story. As the week ends, focus has pivoted from optimism over COVID-19 vaccine efficacy to increased infection rates. The national infection rate has trended toward 1.5%, the largest daily increase since late July, New York City has threatened to shut down in-person learning at public schools, and Chicago issued a stay-at-home advisory effective Monday.
Acknowledging the rising cases and the diminished chances for a fiscal package this year, Federal Reserve officials have turned dovish. Just last week, Fed Chair Jerome Powell said “We think that this very large effective (asset purchase) program is delivering about the right amount of accommodation and support for the markets,” but this week he indicated that the Fed may need to do more to combat near-term downside risks to the economy. Powell said this week, “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States. A COVID-19 vaccine is certainly good and welcome news for the medium term. The next few months could be challenging. It's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term. The path forward is going to be challenging for a number of reasons, my sense is that we will need to do more, and that Congress may need to do more as well on fiscal policy."
The Fed has few options for further accommodation as rates are floored at the lower band and forward guidance indicates rates will remain at current levels through 2023. This leaves the possibility that they may revise Operation Twist which means buying more long-term securities.
Time will tell if this policy option becomes more of a possibility and market participants will be focused on the December Federal Open Market Committee (FOMC) meeting for guidance.
For the week, Treasury yields traded in a much wider range but still increased between 3 and 8 basis points.
Company Spotlight
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APPLE INC |
Apple is in impressive financial health. We remain comfortable purchasing debt issued by the firm. |
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AMERICAN EXPRESS CO |
American Express is in good financial health, evidenced by strong capital levels and exceptional credit quality. We remain comfortable purchasing debt issued by AXP. |
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BOEING CO/THE |
Boeing's decision to shutter MAX production and the opacity surrounding a return-to-service timeline have put pressure on the firm’s credit metrics. We remain comfortable with our holdings of Boeing at this time. |
|
COLGATE-PALMOLIVE CO |
Colgate filed its 10-Q this week. We don’t anticipate the firm will have any problems meeting it’s near term debt obligations and remain comfortable purchasing debt issued by the firm. |
|
COSTCO WHOLESALE CORP |
Costco submitted its financial statements this week. They reflect a very strong company with little risk of default. We continue to remain comfortable purchasing debt issued by Costco. |
|
EBAY INC |
EBay’s financial statements reflect a company in healthy financial shape. We remain comfortable purchasing debt issued by the firm. |
|
GENERAL ELECTRIC CO |
GE's financial statements show a company that is navigating a transitionary period. We continue our wait-and-see approach to GE's massive corporate transformation. |
|
CORNING INC |
Corning released its 10-Q this week. The firm continues to maintain a strong balance sheet and consistent, healthy free cash flow. We remain comfortable with Corning's ability to meet debt obligations. |
|
ALPHABET INC-CL C |
Alphabet's financial statements, filed this week, show an impressively solid balance sheet and substantial free cash flow generation. We remain comfortable purchasing debt issued by the firm. |
|
HONEYWELL INTERNATIONAL INC |
Honeywell is an industry leader in both products and financial strength, we are comfortable purchasing debt issued by the firm. |
|
INTL BUSINESS MACHINES CORP |
IBM filed financial statements this week. The firm continues to generate adequate cash from operations to cover debt obligations. We remain comfortable purchasing debt issued by IBM. |
|
INTEL CORP |
Intel's financial statements show a company with manageable debt levels and meaningful cash flows. We believe Intel has no foreseeable problem meeting its future debt obligations. |
|
3M CO |
3M filed its 10-Q this week. The firm continues to report a strong balance sheet, ample liquidity and substantial free cash flow. We remain comfortable purchasing debt issued by the firm. |
|
MICROSOFT CORP |
Microsoft's financial statements continue to show consistently significant revenue generation and a strong balance sheet. We remain comfortable purchasing debt issued by the firm. |
|
NIKE INC -CL B |
With strong financial statements and the ability to allocate capital as management sees fit, Nike is in impressive financial health. We remain comfortable purchasing debt issued by Nike. |
|
ORACLE CORP |
Oracle submitted financial statements this week. The firm continues generate remarkably consistent free cash flow, sufficient enough to fund its generous capital return program and service its debt obligations. We remain comfortable purchasing debt issued by Oracle. |
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PROCTER & GAMBLE CO/THE |
P&G reported a very nice quarter and the financial statements continue to reflect the benefits of scale. We remain comfortable with the firm's ability to service its debt obligations. |
|
TJX COMPANIES INC |
TJX's financial statements, filed this week, reflect a company in sound financial health. We remain comfortable purchasing debt issued by TJX. |
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November 13, 2020
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||||||
|
Index
|
Current
|
Last Week
|
Wk Chg
|
Last Year
|
Yr Chg
|
|
|
Tax-exempt MMF
|
.05%
|
.05%
|
.00%
|
1.01%
|
-.96%
|
|
|
Taxable MMF
|
.07%
|
.07%
|
.00%
|
1.74%
|
-1.67%
|
|
|
2-Year Treasury
|
.18%
|
.15%
|
.03%
|
1.59%
|
-1.41%
|
|
|
5-Year Treasury
|
.41%
|
.36%
|
.04%
|
1.63%
|
-1.22%
|
|
|
10-Year Treasury
|
.90%
|
.82%
|
.08%
|
1.82%
|
-.92%
|
|
|
30-Year Treasury
|
1.65%
|
1.60%
|
.05%
|
2.30%
|
-.65%
|
|
|
5-Year Exp. Inflation
|
1.65%
|
1.55%
|
.09%
|
1.54%
|
.11%
|
|
|
2-Year Corporate*
|
.41%
|
.38%
|
.03%
|
1.90%
|
-1.49%
|
|
|
5-Year Corporate*
|
.89%
|
.85%
|
.04%
|
2.17%
|
-1.28%
|
|
|
10-Year Corporate*
|
1.71%
|
1.67%
|
.04%
|
2.70%
|
-.98%
|
|
|
30-Year Corporate*
|
2.73%
|
2.74%
|
.00%
|
3.38%
|
-.65%
|
|
|
2-Year Municipal**
|
.31%
|
.28%
|
.04%
|
1.17%
|
-.86%
|
|
|
5-Year Municipal**
|
.43%
|
.41%
|
.02%
|
1.31%
|
-.88%
|
|
|
10-Year Municipal**
|
.99%
|
.97%
|
.02%
|
1.76%
|
-.77%
|
|
|
30-Year Municipal**
|
1.78%
|
1.74%
|
.04%
|
2.41%
|
-.63%
|
|
|
10-Year German Govt Bond
|
-.55%
|
-.62%
|
.07%
|
-.36%
|
-.19%
|
|
|
10-Year U.K. Govt Bond
|
.34%
|
.27%
|
.06%
|
.71%
|
-.37%
|
|
|
10-Year Japanese Govt Bond
|
.02%
|
.01%
|
.01%
|
-.09%
|
.10%
|
|
|
10-Year Spanish Govt Bond
|
.11%
|
.09%
|
.01%
|
.45%
|
-.34%
|
|
|
10-Year Italian Govt Bond
|
.66%
|
.64%
|
.02%
|
1.32%
|
-.66%
|
|
|
Fed Funds
|
.25%
|
.25%
|
.00%
|
1.75%
|
-1.50%
|
|
|
Prime Rate
|
3.25%
|
3.25%
|
.00%
|
4.75%
|
-1.50%
|
|
|
Dollar***
|
$92.75
|
$92.23
|
$0.52
|
$98.16
|
-$5.41
|
|
|
CRB
|
$151.86
|
$147.70
|
$4.16
|
$180.09
|
-$28.23
|
|
|
Gold
|
$1,886.10
|
$1,951.70
|
-$65.60
|
$1,473.40
|
$412.70
|
|
|
Crude Oil
|
$40.15
|
$37.14
|
$3.01
|
$56.77
|
-$16.62
|
|
|
Unleaded Gasoline****
|
$1.13
|
$1.08
|
$0.04
|
$1.49
|
-$0.37
|
|
|
Note: Municipal yields are as of the previous business day.
|
||||||
|
* Composite A
|
||||||
|
** General Obligation AA+
|
||||||
|
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world
|
||||||
|
currencies).
|
||||||
|
**** Futures price per gallon
|
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