The Global Markets Weekly – 4/28/17

Posted April 28, 2017 by rvillareal

Temporary Q1 U.S. GDP Soft Patch

The advance report on U.S. Q1 real GDP is soft as expected, rising just 0.7% (Consensus: 1%; DE: 0.8%) on mild consumer spending after three strong gains of 3%-plus, and 0.9 percentage points of drag from inventories. Business investment at 9.4% annualized perked up nicely, largely driven by a jump in mining and oil activity after years of soft performance. If consumer spending rebounds consistent with the strength in the labor market and confidence Q2 could easily top 3% with a modest amount of inventory rebuilding.

The broad contours of this report were well-telegraphed, so DE continues to stress that timelier reads on the labor market and consumer/business sentiment (strong) are far more important than this delayed look at the first quarter.

The weak components to Q1 suggest a firmer bounce in Q2, DE tracking 3%-to-3.5%, then on average 2.5% to 3% in the third and fourth quarters. This assumes meaningful tax cuts/reform get done this year, setting up for firmer growth in 2018 and beyond. DE expects 3.5% growth in 2018, then 3.2% in 2019.

The disconnect between consumer sentiment and spending is not unusual, and can in part be reconciled by looking at the split between confidence across Republicans and Democrats—the latter are far more downbeat post-election, after a period of strong sentiment, while Republican sentiment has surged massively relative to the last 8-10 years. The surge among Republicans has swamped the latter to boost the top-line sentiment figures. Still, a spending rebound ahead is already justified by faster wage and job gains, with tax cuts and reform posing an upside risk that must be penciled in to baseline projections.

Markets are likely too downbeat on the odds that tax reform, cuts, deregulation, and infrastructure stimulus lift U.S. economic growth later in 2017, and for the next several years. DE continues to expect economic growth significantly stronger than the latest Federal Reserve and Consensus forecasts, incorporating “overshoot” relative to Fed projections of 2% growth on average. DE expects price inflation higher and sooner, and the jobless rate much lower than the conventional definition of the full employment unemployment rate.

• S.: The highlights will be the FOMC Meeting and Statement (Wed), and the April employment report (Fri), the latter likely to show a clear rebound from a weather-impacted March soft patch. The April ISM Surveys (Mon/Wed) and light vehicle sales (Wed) will be key inputs into Q2 tracking estimates, while March PCE data (Mon) were already incorporated into the Q1 GDP report.
• Eurozone: We get a look at Q1 growth (Wed) in an environment where survey data have been strong and downside risks are abating. EU officials will be setting forth a set of guidelines for Brexit talks over the weekend. In France, Macron and Le Pen will take part in a televised debate Wednesday night.
• China: Both the government-compiled and private sector PMIs are likely to remain resilient in April, but high debt growth makes growth foundations less sturdy, not more!
• Other central banks: We get a meeting in Australia (Tue), where the central bank will remain on hold.

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