The Market Today
1Q GDP Set to Beat Expectations as U.S. Data Improves
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Friday’s 1Q GDP Report Expected to Be Strong, Partially on Likely Temporary Factors: After a week that saw more-stable U.S. economic data, including a solid rebound for the consumer via the retail sales report, this week’s calendar is fairly light with a handful of housing reports (Mon. and Tue.), business investment (Thu.), and the first look at 1Q GDP (Fri.). The 1Q data on trade and inventories has provided some upside risk to our expectation for growth (+1.8%). After last week’s data, the Atlanta Fed GDPNow tracker is now pointing to 2.8% growth and most economists are projecting something in the 2.0-2.5% range. If correct, this will prove to be a much better-than-expected result given all of the uncertainty that plagued the quarter. However, the trade results do not appear to be sustainable in the short-term and any high-side surprise is likely to reverse in 2Q and/or 3Q.
Existing Home Sales Expected to Revert after Huge February Gain: As for this morning’s calendar, March’s existing home sales report is expected to show a 3.8% drop in sales after an outsized 11.8% gain in February. If the March pullback is marginal, the markets are likely to be unmoved given that the bulk of the housing data has shown a recent renaissance, likely the result of falling mortgage rates. As highlighted last week, new purchase applications for homebuyers have risen for six consecutive weeks, the longest such stretch since 1990. In fact, the four-week moving average for new purchase applications is now up 89% from its year-end nadir.
ICYMI Vining Sparks’ Weekly Market Recap – Yields Fell as Growth Concerns Persisted Despite Surprisingly Strong Retail Sales Rebound
As Stocks Climb, Some Investors Wonder When to Get Out (WSJ): “Major U.S. stock indexes are approaching fresh records, leaving investors with a difficult choice: Lock in this year’s startling gains or hang on for the ride. The S&P 500 is on track for the best four-month start to the year in more than three decades, gaining 16 percent to be less than 30 points from a record. The index’s surge surprised many Wall Street banks that expected a much slower rebound from 2018’s turbulent finish. … Yet the gains have stalled in recent weeks, with swings and trading volumes dropping to their lowest levels in months. Many fund managers are holding back from adding to stock allocations or even reducing them, worried that the volatility that buffeted markets at the end of last year could return if a recent cautious shift by central banks fails to bolster global growth or if global trade frictions rise.”
Market Risk of Fed Policymakers Turning Back to Tightening Posture in 2H19 (Bloomberg OpEd, El-Erian): “It is no surprise that the possibility of a market ‘melt up’ for the rest of 2019 is becoming a more common refrain among investors. … Although there are understandable reasons for this optimism about the future, two uncertainties risk being assumed away in this melt-up scenario, and they don’t relate to the trade and political issues … those [the most important risks] have to do with the ability of a predominantly liquidity-driven rally to overcome two factors: a slow and uncertain handoff to the stronger global economic fundamentals required to sustainably underpin elevated asset prices; and the tricky policy balance that the Fed faces in the context of a divergent global economy in which the U.S. continues to be the notable outperformer among the advanced countries, the already considerable yield differential between the U.S. and Germany widens further, and the dollar strengthens.”
“The economic weakness of Europe was illustrated again last week by purchasing managers’ index data that showed contraction for the euro zone aggregate, as well as the country measure for France, and a Germany stuck at a contractionary reading of 45. The Chinese data have been more encouraging, but there remain questions about the longer-term impact of a substantial stimulus effort by authorities … By contrast, U.S. economic readings have been more encouraging. … but good news for the U.S. economy entails a tricky policy challenge for the Fed. … The minutes of the last Open-Market Committee meeting confirmed that the Fed’s policy U-turn was influenced by concern that U.S. growth and inflation outlooks would be undermined by spillovers from weaker international conditions and volatile financial markets, as well as trade tensions. Especially with the brighter prospects for a China-U.S. trade deal over the next few weeks, and with the stabilization of the Chinese economy, these concerns have been eased considerably, opening up the possibility of Fed-induced volatility as central bankers try to guide later this year toward a less accommodating monetary policy than what’s priced into markets.”