Despite stronger-than-forecast third-quarter growth, US investors are now more upbeat about the chances of a rate cut after a key briefing document for the Federal Reserve's December meeting showed a slowing in the pace of activity in parts of the economy and a further slipping in cost pressures.
Shares and commodities, led by gold and oil, rose strongly on Wednesday, even though there was no sign from the Fed of a change in approach.
The so-called Beige Book, a summary of the state of the US economy from the Fed's 12 reporting districts across the US, was weaker than expected.
The Beige Book is anecdotal, not data-based, and many investors forget that and treat it as a big deal at times when there seems to be a change in the economy.
The report is issued two weeks before the next Fed meeting (on December 12 and 13) but is not data-derived or driven.
Economic activity has slowed since the previous report, with retail sales declining, on average, as "consumers showed more price sensitivity," the Fed said in the Beige Book, which was based on anecdotal information collected by the Fed's 12 districts through November 17.
"The economic outlook for the next six to twelve months diminished over the reporting period," it added. The report said demand for labor continued to ease, with wage growth remaining modest to "moderate in most Districts," according to the report.
The pace of inflation "largely moderated" across districts, though prices remained elevated, the report showed, with a notable rise in utilities and insurance costs across most districts. Most districts, however, expect moderate price increases to continue into next year, the report added.
It was released the same day as the second estimate of US third-quarter GDP showed a surprise 5.2% growth rate, up from the 4.9% initial estimate and forecasts for a rise of 5%.
The much faster pace of growth was the product of better-than-expected business investment and stronger government spending, the report from the US Commerce Department showed.
Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures, equipment, and intellectual property. The category showed a rise of 1.3%, which still marked a sharp downward shift from previous quarters.
Government spending also helped boost the estimate, rising 5.5% for the July-through-September period, but consumer spending saw a downward revision, now rising just 3.6%, compared with 4% in the initial estimate.
Corporate profits accelerated 4.3% during the period, up sharply from the 0.8% gain in the second quarter – that was strongly suggested by the outcome of the third-quarter reporting season, which was better than forecast.
The personal consumption expenditures price index, a gauge the Federal Reserve follows closely, increased 2.8% for the period, a 0.1 percentage point downward revision. However, the chain-weighted price index increased 3.6%, a 0.1 percentage point upward move.
The October PCE data is due for tonight, and investors are looking for no change in the data's core price index, which was up 0.3% in September from August.
Economists say that if the tone of the Beige Book is right, then the US economy is heading for a sharp slowdown in the coming months from that 5.2% annual rate in the three months to September, which is why the chances of a rate cut have risen, according to investors.
That's why the key US 10-year T-bond yield fell to 4.27% on Wednesday afternoon in the US (and why gold surged again to $US2,066 an ounce for the Comex continuous price with the February price around $US2,065 an ounce.
The US dollar was mixed to weaker but slightly firmer against the Aussie, which was around 66.10 US cents at 7.30 am Thursday, Sydney time. That was down half a percent for the session.
