BMA Market Insights: Q1 U.S. Economic Growth Data Takes Spotlight

First quarter U.S. GDP data will draw the markets’ attention later this week, particularly given recent concerns over a slowing global economy. Softness in the manufacturing sector, triggered by trade uncertainty and waning benefits from the $1.5 trillion fiscal stimulus package, weigh on the quarter’s economic growth. On the flip side, recent data releases indicate that the economy picked up steam with some practitioners expecting an annualized growth rate of 2.4% for the quarter, up from the 2.2% pick-up in growth in Q4 2018. Last week’s economic data releases, which included strong retail sales data in March, a decline in the trade deficit, and continued strength in the jobs market all point towards greater economic momentum.

Prior to the release of U.S. Q1 2019 GDP data on Friday, central banks take center stage, with the Bank of Canada and the Bank of Japan to set their key policy rates followed by press conferences.

Weakness in housing and energy coupled with uncertainty surrounding trade weighs on the Bank of Canada who meets mid-week. While the key policy rate will likely remain at 1.75%, market participants believe the BoC will scale back forecasts for future hikes, partly on the back of recent lackluster economic data. The bank is also expected to provide an update on the economic outlook and its estimate of the neutral interest rate – where monetary policy neither spurs nor restrains growth.

Following the BoC, the Bank of Japan will likely keep its policy rates unchanged with the short-term policy rate at -0.1% and long-term yields at zero. The bank is meant to share its economic forecasts with inflation likely to remain below its 2% target over the next few years.

Last week, robust Chinese economic data served as a boon to the markets. The world’s second-largest economy appeared resilient as GDP growth, industrial production, and retail sales all surprised the market to the upside. Supportive government measures including fiscal stimulus and infrastructure spending have helped fuel the economy. Consumer confidence may also be gaining steam, given trade tensions between China and the U.S. dissipate as the two sides recently noted coming closer to an agreement. Finally, relatively strong U.S. economic data helped propel the markets towards the end of the week.

The optimism propped up equities and drove both Treasury yields and oil prices higher. Both the S&P 500 and Dow Jones closed the week at 2,905.3 and 26,559 respectively. U.S. Treasury yields gained over the week, with the 10-year yield hovering around 2.56% at the close. WTI crude also gained momentum and traded around $64.05. Geopolitical risks, particularly in Libya, Venezuela, and Iran coupled with OPEC-led supply-side cuts have largely supported higher oil prices since the start of the year.

I. U.S. Economic Data/Markets

Housing Starts fell to near a two-year low, by 0.3%, to an annual rate of 1.139 million units in March. The drop was largely due to declines in the single-family housing sector. Building permits also dropped, by 1.7%, at a rate of 1.269 million units, the lowest in five months.
March Retail Sales jumped 1.6%, after declining 0.2% in February and versus expectations of an 0.9% increase. It was the biggest increase since September 2017.
- Core retail sales (excluding automobiles, gasoline, building materials, and food services) edged higher by 1.0% relative to a 0.3% fall in February.
- Consumer spending reflects more than two-thirds of economic activity.
Philadelphia Fed Manufacturing index dropped in April to 8.5, the lowest level in three years, from 13.7 in March.
Weekly Jobless Claims surprised to the upside, dropping by 5k to 192k last week, versus forecasts of a 205k rise. It was the lowest the reading since September 1969. Claims have declined for five consecutive weeks.
Beige Book indicated tight labor markets, with a shortage of skilled labor and moderate increases in prices from March to early April.
- Consumer spending was mixed and weak within the auto sector.
- Trade uncertainty continued to weigh on the manufacturing sector.
- Severe weather in the Midwest has impacted the agricultural sector.
Trade Balance deficit fell to an eight-month low, dropping 3.4% to $49.4 billion in February. It was the second consecutive month that reflected a drop in the deficit.
- Exports increased by 1.1% on the back of aircraft, autos, and medicine, whereas imports rose 0.2%.
- The goods deficit with China dropped 28.2% to $24.8 billion.
Industrial production fell by 0.1% in March versus expectations of a 0.1% gain. While production slightly gained in February (by 0.1%), readings have been weak for the past four months. A drop in auto production and capacity utilization contributed to the data.
- Trade uncertainty coupled concerns surrounding economic outlook, particularly with the Fed on hold has weighed on production.
Fed Official Rosengren expressed that the Fed should target a range for inflation, echoing Fed sentiment (see below) that inflation should be left above 2% in times of economic expansion. The Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index, is currently at 1.8%.
Fed Official Evans noted that he could see the fed funds rate left unchanged until the fall of 2020, given inflation levels have remained below the Fed’s target of 2%.
- Evans previously expressed he would be fine with letting prices rise above 2% when the economy is expanding to counter times of lower inflation and slower economic growth.
- He is not concerned about a potential recession given the strong labor markets.
- Expects economic growth in 2019 to be between 1.75% and 2%.

II. Trade

China/U.S. will aim to come to an agreement by the end of May/early June based on a fresh tentative schedule for rounds of talks over the next few weeks.
Trade talks between Japan and the U.S. kicked off early last week.
- Agriculture and auto sectors will likely be targeted in the discussions.
- Japan has about a $68 billion trade surplus with the U.S., largely on the back of auto exports.
- Officials noted possibly embedding a currency provision in the ultimate agreement to avoid any FX manipulation.
- The Nikkei reached a 4.5 month high (22,312.81) mid-week on the hopes of progress regarding Japan/U.S. trade discussions and strong Chinese economic data.

III. Non-U.S. Economics

Eurozone Economics
- Eurozone PMI fell to 51.3 in April from 51.6 in March – signaling continued economic weakness in the region. It was the lowest reading in three months.
  - Both manufacturing (47.8 vs. est 47.9) and services came in lower than expected (52.5 vs. est 53.2).
- German Composite PMI rebounded to 52.1 from 51.4 from last month.
  - Services sharply increased to 55.6 (the highest reading since September 2018), compensating for manufacturing that came in at 44.5. Anything below 50 signals a contraction.
- German economic sentiment measured by the ZEW survey picked-up in April and entered into positive territory at 3.1, versus expectations of 0.8. The more positive sentiment was largely driven by a slightly improved global economic outlook.
U.K. Economic data
- Retail Sales rose 6.7% y-o-y in March the highest since October 2016. Sales rose in all categories outside of department stores and household goods.
- Unemployment remained steady at multi-decade lows of 3.9%.
  - Earnings increased by 3.5% annualized, for the three months ending in February – in line with expectations and the highest rate since 2008.
  - Wages have risen faster than the Bank of England has forecasts – suggesting that the BoE may raise rates fairly quickly once Brexit uncertainty diminishes.
- Retail Price index came slightly below expectations at 2.4% versus estimates of 2.6%.
- Inflation, as measured by CPI, stayed pat at 1.9% y-o-y in March, partly on the back of Brexit uncertainty. Analysts expected inflation to come in closer to 2%, the BoE’s target level for inflation.
Japanese Economics
- Bank of Japan’s Gov. Kuroda noted that there is room for further monetary policy easing for both long- and short-term rates.
  - Acknowledged a slowdown in the economy on the back of weaker exports to China.
- Core CPI pick-up in March by .08% y-o-y versus forecasts of 0.7%.
Canada Economics
- Retail sales edged higher in February rising 0.8% versus forecasts of 0.4%.
- March CPI increased 1.9% y-o-y, in line with expectations and up from 1.5% in February. Excluding energy, CPI rose 2.2%. Produce such as vegetables, autos and mortgage payments contributed to the rise.
- Canada’s trade deficit narrowed to $2.9 billion in February compared to a deficit of $3.1 billion in January. Exports and imports fell by 1.3% and 1.6% respectively. The fall in exports represented the sixth decline in seven months.
China Economic data
- GDP for the first quarter surprised to the upside coming in at 6.4% y-o-y, versus expectations of 6.3%.
  - An 11.8% increase in property investment helped boost growth.
- Industrial production sharply increased by 8.5% y-o-y compared to forecasts of 5.9% – the fastest annual pace since 2014.
- Retail Sales also surprised the market at 8.7% y-o-y versus forecasts of 8.4% y-o-y. Online consumption remained robust and demand from rural areas outpaced that from urban centers.