Three “Data” items today.
#1: The Atlanta Fed’s GDPNow model is still reducing its estimate for Q3 US economic growth. Yes, we said the same thing just a few days ago, when the model’s GDP estimate for the just-ended quarter was +2.3 percent. As of its latest readout, however, GDPNow is saying Q3 only showed +1.3 percent growth.
As you can see in the Atlanta Fed chart below, the trend in model’s revisions has been solidly lower since the beginning of September (yes, right when the S&P 500 peaked for the year):
About the only good news here is that supply constraints are a contributing factor to these declines in expected US economic output. As economic data related to construction spending, light vehicle sales, and manufacturing have been released, GDPNow has consistently lowered its Q3 estimate. The next two GDPNow updates will be tomorrow (after the Jobs Report) and then a week later (with Retail Sales). Weak prints on either/both could take the model’s Q3 estimate into negative territory.
Takeaway: the GDPNow model continues to signal a slowing US economy and we’re now in the 30-day window where its output has historically been at its most accurate. Yes, it is just a model so (as we said in “Markets”) it is by definition wrong to some degree. We remain concerned, however, that its trajectory is so resolutely negative.
#2: The investment world’s most-watched oddball indicator of US inflation trends just made a new high. We’re referring to the Manheim Used Vehicle Value Index, of course, although we can with some pride say we’ve been following it for decades because we’ve covered the auto industry for that long. Here is Manheim’s chart of their index, with our annotations to highlight the +40 percent increase in used car/truck prices from early 2020 to now:
Takeaway: while used vehicles are only 3.5 percent of the US Consumer Price Index, they have been a key component of overall CPI inflation (20 pct of total last month), and the Manheim data shows they will continue to support inflation concerns in upcoming reports. At one level, it is easy to dismiss this as “transitory” inflation since the root cause is the chip shortage hitting new vehicle production. That problem will eventually be resolved. While we largely buy that argument, we also know that outside of recessions used vehicle prices never really decline (the 1997 – 2020 part of the chart shows that well). As new vehicle production increases, therefore, used vehicle prices should stabilize. But the inflation we’ve seen in the last 12 months – used car and otherwise – is likely here to stay.
#3: The World Gold Council is out with its latest analysis (September month end) of global money flows into/out of global physical gold-backed exchange traded funds. Their information differs from the Investment Company Institute data we show you weekly because it includes fund flows from every region of the world.
As the WGC chart below shows, the correlation between global gold ETFs fund flows (bars, color coded by region) correlates very strongly with the direction of gold prices over the last 2 years. Peak inflows were in June 2020 ($10 billion), and so were peak gold prices. Subsequent fund outflows (November 2020 – April 2021) hit the yellow metal’s price, even if it did rebound briefly in May 2021 with that month’s inflows. Last month saw $800 million in global gold ETFs outflows and, unsurprisingly given the data we’ve just outlined, gold prices declined.
Takeaway: whenever we show this graph clients invariably write in to ask if virtual currencies are taking market share from gold and depressing its price. The short answer is “most probably” because the pandemic hit physical gold’s traditional end markets in China and India, leaving the commodity’s price to the vagaries of global investment flows. That’s why the chart above looks the way it does. Imagine what gold ETF inflows would have been over the last year if there were no virtual currencies. Much higher than we’ve gotten, we suspect, and with those much higher gold prices would have been an all but inevitable outcome.
Atlanta Fed GDPNow: https://www.atlantafed.org/cqer/research/gdpnow
Manheim Used Vehicle Value Index: https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
World Gold Council Fund Flow Data: https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows