Bloody Mary Morning: Dow Down 434 Points, US Treasury 10 Yield Down 17 BPS (Goldman Downgrades Q3/Q4 GDP Forecast)

As Willie Nelson used to sing “It’s a Bloody May Morning.”

The economic news this morning was not good. Retail sales were weaker than expected, as was the Empire Manufacturing index.

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And Goldman Sachs downgraded Q3/Q4 GDP in this report:

BOTTOM LINE: Business inventories rose less than expected in August. In light of the disappointing September retail sales report and slower-than-expected inventory growth in August, we reduced our Q3 GDP tracking estimate by three-tenths to +3.2%. We also moved our Q4 GDP forecast down a quarter point to +3.0%.

MAIN POINTS:

1. Business inventories rose 0.2% in August (vs. consensus +0.4%). Retail inventories—the only component of the report not already known for the month—declined 0.3%. Auto and auto parts inventories declined 0.7%, while ex-autos inventories were flat.

2. In light of the disappointing September retail sales report and slower-than-expected inventory growth in August, we reduced our Q3 GDP tracking estimate by three-tenths to +3.2%. We also moved our Q4 GDP forecast down a quarter point to +3.0%, due to weaker momentum in consumer spending heading into the quarter.

Markets did not react well.

The Dow is down 434 points as of 1:42pm EST.

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US Treasury 10 year yields are down 18 basis points to near 2.0%.

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Across the bond, Greek 10 year yields are UP 77 basis points, Portugal’s UP 22 basis points and Italy’s UP 12.5 basis points.

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And the US Dollar against The Gyro? I mean Euro

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Opa! opa2

And to quote The Bard from King Lear …

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The Labor-less Recovery: US Real GDP Increases To 4.6%, Wage Growth Remains At 2.1% (Rentals Keep Growing)

The banner headline this morning is that US real GDP increased 4.6% in Q2, the highest since 2011 and just in time for the midterm elections.

Too bad that wages earnings growth is only 2.1%, about the same as the inflation rate.

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Meanwhile, personal consumption growth grew at 2.5%, once again above the growth in wage earnings of 2.1%.

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This stagnant labor recovery and income is also leading to a surge in renter occupied units.

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“The labor market has yet to fully recover,” Federal Reserve Chair Janet Yellen said at a press conference after a monetary policy meeting concluded Sept. 17. “There are still too many people who want jobs but can’t find them.”

Thanks for that observation, Cpt. Obvious.

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US Q2 Real GDP Adjusted Upwards To 4.2% (PCE Up Only 2.5% But Durable Goods Up 14.3%, Fixed Investment Up 17.5%)

The Bureau of Economic Analysis (BEA) has released their adjustment to the Q2 GDP report of 4.0%. It has been revised upward to 4.2%! Just in the nick of time too since the midyear elections are just around the corner!

Here is an interesting piece of information. Personal Consumption Expenditures (typically about 70% of GDP) rose by only 2.5%. But Durable Goods Expenditures rose by 14.3%, the largest increase since 2009. Lots of aircraft orders for Boeing!

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Fixed investment rose 17.5% in Q2, the largest increase since Q4 2011.

Although not in the GDP report, real wage growth is 0%. That is correct. NO WAGE GROWTH!

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So, Personal Consumption Growth rose only 2.5%, but Durable Good Expenditures rose by 14.3% and fixed investment rose by 17.5% with NO REAL WAGE GROWTH.

The reaction in the bond markets? US Treasury 10 year yield dropped to 2.330%.

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The BEA spokesman announcing the Q2 GDP revision and sees nothing but untapped economic potential.

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Japan Sinks Into the Abenomics Abyss (Debt to GDP at 226%, Q2 GDP Likely to Fall 5%, House Prices Continue to Fall)

Japan faces severe economic problems. An aging population, swelling pension liabilities and staggering debt. Japan’s debt as a percentage of GDP stands at 226%!

The problem facing Japan’s Prime Minister Shinzō Abe is that the continued run-up of government debt has done virtually nothing to grow real GDP QoQ.

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And Q2 2014 GDP growth is likely to print at -5%.

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The NOWCAST model forecasts a 10% drop in Q2.

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Whether it is -5% or -10%, Japan’s experiment with Abenomics and massive debt expansion is failing.

Throw in the continued decline of house prices, and Tokyo, we have a problem.

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The Great Abenomics hopium turned out to be the same big borrow and spend lunacy that has Europe caught in a bear trap.