Economic Outlook – 29 April 2018
- US real GDP growth slowed in the first quarter to an annualised pace of 2.3 %. One key reason for the slower growth rate was that consumer spending grew at just a 1.1% annualised clip. That is the slowest pace in more than four and a half years. Did something happen to surging consumer confidence and tax cuts? Admittedly, the 4.0% growth rate in the final quarter of 2017 was a tough act to follow. Some of the Q4 strength in consumer spending had to do with revved-up auto sales after hurricane-related flooding resulted in replacement spending at the time. Outlays for motor vehicles added 0.45 percentage points to Q4 growth and subtracted 0.42 percentage points from Q1.
- Consumer confidence rose to 128.7 (the second-highest level reached for this bellwether since 2000). Similarly, the unemployment rate, which presently is 4.1%, has not been so low since 2000. In fact, the US economy is a few ticks away from 3.8%, the cycle low in 2000. To find a lower unemployment rate, we need to go back to the 1960s. While participation is not what it used to be, it stands to reason that the job market is presently in good enough shape to sustain further growth in consumer spending.
- Double-digit percentage gains in orders for both civilian and defence aircraft lifted overall durable goods orders to a better-than-expected monthly increase of 2.6%. But elsewhere, orders were flat in March when you exclude the volatile transportation sector. Despite sustained high levels for ISM new orders, actual orders remain inconsistent.
- Core capital goods shipments tend to be a good indicator for equipment spending, and that offered a last minute preview for the equipment line in Friday’s GDP report, as this series posted a three-month annualised growth rate of just 4.1%. The equipment spending line in the GDP report was 4.7%. The notion that the soft patch in capital spending might only be delayed is sullied by the fact that core capital goods orders fell in March, and the three-month annualised rate is in negative territory.
- March new home sales jumped 4.0%, which exceeded the 1.9% gain that had been expected. Not only that, the data for the prior month (February) was revised higher as well. The annualised pace of new home sales, now at 694K, represents the fastest pace of the current expansion. Weather still appears to be playing a factor. New home sales were down in the Northeast as realtors perhaps found it difficult to get potential buyers to look at listings in the region.
- US 10-Year treasuries yield briefly touched the psychological level of 3.00%, the first time since 2014, hitting as high as 3.033% last Thursday. Inflation expectations rose recently thanks to the Fed’s more hawkish policy tones and a stream of positive economic data leading to speculations that the Fed might hike interest rates for four times in 2018. Adding fuel to fire was the fiscal stimulus from the Republican tax cuts that prompted worry that the US economy might grow at a much faster rate. Higher inflations and yields would translate into higher borrowing cost for both the federal government and corporate sector eating into corporate profits. That said, the concern has eased since then as 10Y treasuries retreated below 3.00% again. The equity markets rallied amidst busy corporate earnings week led by gains in tech stocks and generally positive earnings across all sectors.
- In an effort to mend a growing trade rift, President Trump announced he was sending a high-level delegation to China next week to hold talks. The delegation will include Treasury secretary Steven Mnuchin and US trade representative Robert Lighthizer, as well as Trump advisors Lawrence Kudlow and Peter Navarro.
- The major benchmarks were flat to modestly lower for the week as investors reacted to the heaviest flow of earnings reports of the season. Close to 168 of the companies in the S&P 500 Index, representing 42% of its market capitalisation, were due to report first-quarter profits during the week. The small utilities and real estate sectors outperformed within the S&P 500, while the industrials segment performed worst. Stocks suffered most of their declines for the week on Tuesday, driven in part by a plunge in Caterpillar shares after officials at the industrial equipment giant cautioned that profits might have reached a “high-water mark for the year.” 3M also fell sharply on a lower profits outlook. The two stocks’ declines weighed particularly heavily on the narrowly focused Dow Jones Industrial Average given their heavy weighting in that index.
- Despite fears about future profit momentum, the strong current earnings environment provided some support to the market during the week. Thursday brought the week’s best daily performance after Facebook shares recouped some of their recent losses and soared over 9% following the release of revenues and profits that easily beat estimates. Fellow Internet giant Amazon.com gained nearly 4% following an earnings beat. By the end of the week, analysts polled by data and analytics firm FactSet were expecting first-quarter earnings for the S&P 500 as a whole to have expanded by over 23% on a year-over-year basis. Analysts at Thomson Reuters were even more bullish, anticipating that earnings would grow by nearly 25%, led by energy and technology firms.
- On Tuesday, the ISM manufacturing index is due out and a fall from 59.3 to 58.0 is in order. The index is expected to decline further over coming months but stress that ISM manufacturing has been elevated for quite some time now compared with other indicators and hard data.
- At the May FOMC meeting on Wednesday, the Fed is expected to maintain the target range at 1.50% to 1.75%. As this is one of the small meetings without updated dots and no press conference, the Fed is unlikely to change its policy signal significantly. The expected June hike is almost already fully priced in and the meeting is unlikely to change much. Two additional Fed hikes are expected this year, with the risk skewed towards a third.
- On Friday, the jobs report for April is due out. As employment continues to rise, the main focus is still on average hourly earnings, as many economists are still puzzled about why wage growth (and inflation) remains subdued, as the labour market has tightened substantially.
- UK GDP growth was much weaker than expected in Q1. In the quarter, GDP was up just 0.1% after growing by 0.4% in Q4 of last year. The consensus expectation was for quarterly growth of 0.3% and the Bank of England also expected 0.3%. The year-on-year growth rate fell to 1.2% in Q1 from 1.4% in Q4. The Q1 GDP growth rate was the slowest since Q4 of 2012 and while bad weather had negatively impacted construction and retail sales, the effects were generally small, according to the ONS.
- The odds of a rate hike from the Bank of England at its May meeting have fallen to just 20% after weak Q1 GDP data were released. The British economy expanded just 0.1% in the first quarter, the weakest quarterly showing since 2012. Harsh winter weather received the bulk of the blame for the economy’s poor performance.
- In the UK this week the PMIs for April comes due, giving us an initial impression of economic growth at the beginning of Q2 (the first estimate of Q1 GDP growth is due out tomorrow Friday 27 April). PMI services fell sharply to 51.7 in March, which was much more than suggested by the confidence indicators.
- The European Central Bank (ECB) kept its key interest rates unchanged and offered no fresh leads as to where the policy might be in June 2018. The governing council noted that growth has moderated and the loss in momentum was broad-based and to quote ECB president Mario Draghi, “some normalisation is expected” following a few quarters of above average growth in 2017. Policy outlook was not discussed, as it was premature to decide whether temporary or permanent factors are in play. ECB projected that headline inflation to remain below the ECB target of close to but below 2% while underlying inflation to remain subdued but the central bank is confident that inflation will converge to the target over the medium term.
- European stocks broadly gained as investors digested a flood of corporate earnings and welcomed a seemingly dovish monetary policy statement from the ECB. In the Eurozone, Germany’s exporter-heavy DAX 30 Index lagged the broad European region, while France’s CAC 40 Index outperformed.
- French President Emmanuel Macron visited Washington DC, where he displayed a friendly relationship with US President Donald Trump but criticised protectionist trade policies in an address to a joint session of Congress. Macron said he sees President Trump putting an end to the Iran nuclear deal negotiated by the Obama administration. Macron has championed replacing the existing agreement with one that not only limits Iran’s ballistic missile programme, but also puts to an end any Iranian nuclear ambitions for the long-term, as well as its ballistic missile programme. Trump must re-certify the existing deal every six months, and it is believed that he is unlikely to do so this time around. 12 May is the due-date for the next recertification.
- German Chancellor Angela Merkel met with Trump on Friday in Washington, where the two were also expected to discuss trade policy and Iran.
- In the euro area, the GDP growth figure for Q1 2018 is due for release on Wednesday. After GDP growth beat expectations and showed growth of 0.7% quarter-on-quarter in the final three quarters of 2017, a slowdown in Q1 2018 to 0.4% quarter-on-quarter is expected. Activity indicators have shown declines throughout the year so far, with the PMI figures in particular falling since the beginning of the year, pointing towards lower growth. However, one-off factors might also have played a role and the EU economy is still in expansionary territory, expecting solid GDP growth throughout 2018.
- Available indicators point to China’s economy having a fairly strong beginning to the year, with few signs of a resumption of the gradual growth slowdown that expected. Even if a fully blown trade war is avoided, there are reasons to expect a slowdown. As the authorities try to reign in financial risks and dampen shadow banking activities, credit growth is slowing, thereby hurting overall economic growth. Furthermore, measures to dampen the wobbly property market, especially prices, have not yet been rolled back, while fiscal policy is being tightened rather than loosened. However, the economy should get some support from the scrapping of the antipollution measures introduced last autumn to improve air quality over the winter, although such measures are likely to be reintroduced next autumn.
- In terms of economic releases, it is time for another batch of PMIs in China. A small further decline in manufacturing PMI is in order (both Caixin and the official PMI), as growth in export markets is fading and slower housing activity feeds through to manufacturing. Softer metal price momentum also points to a moderate slowing of Chinese activity.
Sources: Wells Fargo, T. Rowe Price, Handelsbanken Capital Markets, Danske Bank, MFS Investments, HongLeong Bank