01:49 GMT +316 October 2019
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    Adjustment to Mediocrity: Robust US Growth Won’t Support Rest of World

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    After a turbulent week for the global economy, the steeper advance in US GDP data provided solid support to commodities markets and developing nations, but the positive effect for the latter is hardly a lasting one.

    Kristian Rouz — After the US Department of Commerce reported earlier this week an unexpectedly solid expansion in the US economy, at 3.7% in Q2, market volatility settled down, and global commodity prices soared. However, a mixed bag of US consumption data arrived Friday, suggesting only a moderate optimism. While the US economic growth is still insufficiently robust to drive the global recovery, an influx of domestic and international investment capital in US bonds continues to benefit the US government.

    According to the consumer sentiment index, calculated by the University of Michigan on a regular basis, the confidence of US consumers dropped in August to its lowest for this summer. Wall Street turbulence, global financial turmoil and an uncertain outlook for the US economy all contributed to the mounting concern of US consumers.

    The University of Michigan measure slid to 91.9 for August from that of 93.1 in July, far below previous average forecast standing at 93. Nonetheless, the retreat could have been even more dramatic, had not cheap fuel and recent improvement in the job market supported consumer sentiment. The six-months outlook is gloomy, standing at 83.4.

    Other macroeconomic measures, the actual consumer spending and real efficient wages both grew in July, according to the US Department of Commerce. US personal consumption added 0.3% that month, a similar to that in June. The advance in US consumer spending hit its highest in May, adding 0.8% compared to the retreat of 0.4% seen in January. Meanwhile, US wages gained their highest in July. August figures are yet to be calculated, but the existing numbers generally support the consumer confidence measure for July.

    That said, a slight deterioration in US macro numbers is to be expected a month from now, meaning a weaker outlook for the planned Fed hike in base interest.

    The US economy is not yet showing signs of a sustainable improvement in consumption.

    As the non-financial sector in consumption-driven in America, with some 72% of expansion attributed to personal spending, the US economy is not yet strong enough to provide a lasting improvement in the global commodity market. Which means, North America is not ready to substitute mainland China as the world's principal hub of manufacturing.

    Inflation rose 0.1% to an annualized 1.2%, which is the weakest gain in four years. The number is below the Fed's target 2%, adding a yet another argument against the September hike in borrowing costs.

    Whilst the macro data are mixed, indicating the US economy is on the stage of adjustment to the ‘new mediocre', both domestic and international investors have lowered their anticipation of commercial and financial returns, buying into the less profitable, but safer fixed-income. The current level of market and broader economic uncertainty is a shock to capital by itself.

    The benchmark 10-year US Treasury note yield added 0.14% to 2.18% on Friday, however, the yield was severely battered during the week of over-the-top market turbulence. The current Treasury yield is just above its April lowest, meaning the US debt appreciated significantly, with more capital at the US government' disposal.


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