The Week in Review: U.S. GDP Rises 3.5% amid Low Interest Rates, Europe Bank Failures

The United States saw 3.5% GDP growth in the third quarter of 2014 while the Federal Reserve expects low bond yields to remain for the foreseeable future. In Europe, growth has come to a standstill, with second quarter GDP growth stagnant throughout the Eurozone and negative GDP growth in Germany and Italy dragging down the entire continent.

The United States saw 3.5% GDP growth in the third quarter of 2014 while the Federal Reserve expects low bond yields to remain for the foreseeable future. In Europe, growth has come to a standstill, with second quarter GDP growth stagnant throughout the Eurozone and negative GDP growth in Germany and Italy dragging down the entire continent.

American economic data was bolstered by a narrowing trade deficit as growing domestic energy production limits the need for oil imports while also causing domestic manufacturing to grow. Joblessness remains at their lowest point after the recession, with the 4-week average for new jobless claims at 281,000, the lowest point since May 2000. Meanwhile, consumer spending rose 1.8% in the third quarter despite disinflation causing price growth to halt. Some analysts believe that falling energy prices and falling unemployment are helping spending continue its upward trajectory.

Low Interest Rates

Despite improving economic conditions, low inflation expectations are causing stable long-term Treasury yields as the Federal Reserve predicts low interest rates to remain for now. In a public statement, the Federal Open Market Committee announced that low interest rates will remain for a “considerable time” as “that underutilization of labor resources is gradually diminishing.” 

The FOMC also announced that it would end its QE3 program, but would continue to roll over its portfolio to ensure low long-term interest rates. “This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions,” said the FOMC.

After falling steeply amidst an equity correction earlier in the month, Treasury yields have risen slightly but remain lower than a month ago for all medium and long-term issuances. Yields on 10-year Treasuries have fallen 19 basis points in the last month to 2.29%, and are down 9.5% from a year ago. 30-year treasuries are also down over 17% from a year ago to 3.01%.

Europe Stalls, Banks Fail

Despite their recent fall, U.S. Treasuries still provide a yield premium to core Eurozone nations, where yields have fallen amidst deflation fears. The 10-year yield in Germany has plummeted to 0.9%, down 47% from a year ago. The Bund has seen steeper declines in 2014 as disinflation worsens and the threat of deflation combines with negative GDP growth to signal the risk of a new recession in the core of the European Union.

European bank instability has contributed to the uncertainty, as 25 banks in the Eurozone failed the ECB’s stress test on the 130 largest European banks. The ECB also said that non-performing originations had soared. Banks in Europe are at risk of losing 263 billion euros of Tier 1 capital as 1.2 trillion euros of debt have defaulted throughout the system.

The ECB has begun to purchase asset-backed securities in the form of a covered bond purchasing program similar to the Federal Reserve’s QE programs of the past.

However, critics argue that the ECB’s purchase is too small, since the 1.7 billion euros of covered bonds purchased last week represent 0.0019% of the total non-performing debts throughout the Eurozone.