The Market Today
1Q GDP Revised up to 1.2% on Stronger Business Investment and Personal Consumption
by Craig Dismuke, Dudley Carter
Memorial Day: The bond market has a recommended early close today in anticipation of the Memorial Day Holiday. The markets will be closed on Monday in observance of the holiday. Memorial Day officially commemorates all of the men and women who have given their lives in military service to the United States, originating in different name shortly after the Civil War. According to official figures, the Civil War saw the largest number of American Military persons killed (approximately 750k) followed by World War II (405k). There have been over 1.3 million men and women who have given their lives in combat.
Today’s Calendar – The Data Continues to Raise Eyebrows: The economy expanded 1.2% in 1Q according to BEA’s first revision to the report, half-a-percent better than the initial estimate of 0.7% growth. While this is a better growth rate for 1Q, it remains weak and the implications for 2Q growth are mixed. Net external trade was revised positively with a 2.8 billion smaller deficit thanks to weaker imports. Government spending was revised up $4 billion to show just a $8.3 billion contraction. Private investment was revised higher thanks to a $11.1 billion increase in business investment. However, a larger drawdown of inventories hurt the final investment tally but gives inventories more room to jump in 2Q. Personal consumption was revised $9 billion higher taking the QoQ, SAAR rate from +0.3% to +0.6%, still the weakest rate of consumption growth since 2009. The external trade data will be a headwind for 2Q growth along with the higher basis for personal consumption.
In the initial report on durable goods orders for April, business investment in equipment appears to be weaker than expected. Headline orders fell 0.7%. Excluding transportation items, orders dropped 0.4% while the March figures were revised up from +0.0% to +0.8%. The critical capital goods orders ex. defense and aircraft, a proxy for business investment in equipment, were flat in April versus expectations of a 0.5% increase. Shipments of those items actually fell 0.1% MoM versus expectations of a 0.5% increase. Bottom line: business investment in equipment looks to be starting out 2Q on a weaker foot than expected.
At 9:00 a.m. CT, the May final revision to the University of Michigan Consumer Confidence report will be released.
Overnight Activity – Risk Assets Falter Friday as Oil Falls Further: A bid for safety seeped into overnight trading as oil prices added to yesterday’s dramatic drop. The energy sector is leading a disappointing day for European equities that has knocked 0.5% of value off of the Stoxx Europe 600. The weakness in Europe follows an equally dispirited session in Asia. Sovereign yields ticked lower, with the German 10-year yield down 3.4 bps; down 8 bps in the last two days. Friday’s falter by risk assets pushed the Japanese yen, a top safe haven asset, to its strongest level against the Dollar since the Comey memo story broke last week. The British pound is performing the worst of the major currencies after a recent poll showed the Labour Party gaining on the Conservative Party ahead of the June 8 general parliamentary elections. In mid-April, PM May called for early elections in hopes to leverage her popularity and improve her support base in parliament. It was a quiet day for global economic data with Japanese inflation data the only notable report. Headline inflation rose an as-expected 0.4% in April. Core inflation was unchanged, an improvement from March’s -0.1% result but a continuation of an overall downtrend that began in 2016. Ahead of a busy U.S. economic calendar, U.S. equity futures are softer, the 10-year Treasury yield was 2.5 bps lower, and the Dollar was essentially unchanged.
Yesterday’s Trading – Stocks Climb Despite Oil Drop, Treasury Curve and Dollar Little Changed: Stocks set another record high on Thursday despite oil crashing after the much anticipated OPEC decision. Both the S&P and Nasdaq set new all-time highs while the Dow’s 71 point gain pushed it to within 33 points of a new record. The S&P gained for a sixth consecutive day while the Nasdaq’s 0.7% gain garnered the tech-centric index the title as the day’s top performer. The Nasdaq continues to outperform the other indices and has now gained in 16 of the last 19 sessions. All of the cheer by U.S. equities unfolded at the same time crude prices dropped more than 4%. While OPEC’s extension of current production cuts through March 2018 occurred as expected, it either wasn’t enough to appease markets or investors simply sold the news. After the agreement was announced, Saudi’s oil minister noted that deeper cuts weren’t necessary, a potential catalyst for prices collapsing mid-morning. The mixed performance for equities and oil prices left Treasury yields essentially unchanged. The 2-year yield rose 1.2 bps while the 10-year yield added just 0.5 bp.
Brainard Sees Brighter Global Growth Story: Fed Governor Brainard reiterated the idea from the Fed’s May Minutes that “the risks stemming from global economic and financial developments” have “receded further.” In a Thursday panel discussion on the global economy, Brainard said “As I look out at the global economy today, it is brighter probably than it has been for the last few years, …The balance of risks has shifted because the downside risks from some of those foreign economies” have eased. She said that the situation in China remains “tricky” but that the situations in Europe and Japan have improved. She didn’t discuss specifics of the U.S. economy and the net effect of the remarks should have no impact to expectations for a June hike.
Bullard Recycles Last Weeks Remarks: St. Louis Fed President Bullard reused most of his remarks from last week’s speech where he continued his call for phasing out reinvestments this year and was consistent in his characterization of the Fed’s current rate path as potentially too aggressive. In his speech in Tokyo, Bullard did use an interesting illustration comparing actual inflation path in the U.S. to a consistent 2% path. By doing so, he showed a lag between actual U.S. inflation and a textbook 2% path; saying it isn’t “as severe as the 1990s Japanese experience, but it is worrisome.”
CBO Scores AHCA – Reduces Deficit and Number of Fully Insured (Report): The Congressional Budget Office completed its scoring of the Affordable Care Act “replacement” bill passed by the House. According to the scoring, H.R. 1268 (as it is officially known) would cut direct spending by $1.1 trillion and reduce tax revenues by $992 billion for a $119 billion reduction in the deficit over a 10-year horizon. The headline from the report was the shocking 23 million people who lose insurance. However, CBO uses a baseline criteria for what would qualify as health insurance and noted that, “some people would use the tax credits authorized by the act to purchase policies that would not cover major medical risks.” Because they are not covered for major medical expenses, those persons were not counted in the total number of insured.