The Market Today
Trump Tackles Davos; U.S. Economy Expands 2.6% in 4Q17
by Craig Dismuke, Dudley Carter
Today’s Calendar – GDP Growth Remains Solid on Consumer Strength; Trump Speaks in Davos: The economy expanded 2.6% in 4Q, slightly below estimates but a strong quarter of growth, nonetheless. Driving the strong growth was a substantial 3.8% QoQ, SAAR increase in personal consumption. Heading into the holidays, all signs pointed to a stellar quarter for the consumer which has proven to be accurate. This matched the best quarter for personal consumption since 2014. Housing activity was solid, rising 11.7% QoQ, SAAR and contributing 0.4% to the final growth tally. Business investment was also strong with investment in equipment up 11.4%, intellectual property up 4.5%, and structures up 1.4%. However, inventory growth disappointed, only growing $9.2 billion in 4Q, $29.3 billion slower than 3Q’s growth and cutting into the GDP tally by 0.7%. External trade dragged 1.1% from GDP growth as imports skyrocketed 13.9%, reflected strong demand domestically. Exports rose 7.0%, normally a strong-enough result, but fell short of the growth of imports. As for government spending, it rose the most since 2015 as both state & local and federal spending increased. As for the price deflator, Core PCE prices rose from 1.3 to 1.9% in the quarter. Real final sales to domestic purchasers, a summary measure of strength of U.S. demand, rose 4.3%, the second best rate of growth since 2010.
Two reports were released simultaneous with the GDP report which were estimated in the 4Q GDP. December’s Advanced Goods Trade Balance report showed a larger-than-expected increase in the goods trade balance which will cut into the first revision fo 4Q growth. However, business investment in equipment and software, as shown in the December Core Capital Goods Shipments data was stronger than expected, including a significant revision higher to the November shipment data. Taking the reports in combination, they point to a slightly better 4Q tally in the first revision.
Trump Extolls American Exceptionalism in Davos, Challenges World Leaders: There has been much anticipation about President Trump’s speech in Davos. The President laid out a magnanimous defense of his America First policies and challenged world leaders to represent the people of their countries first, saying that collective benefits will subsequently follow. He began his speech saying that he is there to represent the interests of the American people, and affirm our commitment to helping to build a better world. He went on to say that he will always put the interests of Americans first, just like all world leaders should put the interests of their countries first. However, America First does not mean America alone. He stated that the United States will no longer turn a blind eye on predatory behaviors from foreign trade partners. He invited investors to come to the U.S. He noted that regulation is stealth taxation by unelected bureaucrats. He went on to say that his administration has cut 22 burdensome regulations for every one new rule.
Overnight Activity – Treasury Yields Rebound and European Yields Add to Yesterday’s Rise: European yields added to yesterday’s rise and U.S. Treasury yields have so far followed on Friday, reversing a portion of yesterday’s decline. Core European yields have reached to multi-month, if not multi-year highs since beginning to climb in early December. Germany’s 2-year yield rose to -0.57%, its highest level since June 2016, while the 10-year yield reached 0.62%, its highest level since 2015. The French 2-year and 10-year yield are up to their highest levels since July. The Treasury curve made a slight shift higher that was led by the short end. Ahead of this morning’s busy U.S. economic calendar, the 2-year yield was up 3.0 bps to 2.11%, a new higher for the cycle. The 5-year yield had added 3.2 bps to 2.45%, a new high since May 2010. The 10-year yield was up a smaller 1.9 bps to 2.64%. The Dollar resumed its steep monthly decline after a topsy-turvy day of trading in yesterday’s session (more below) and hit a new more-than-three-year low. U.S. equities look set for a positive open based on early futures trading and following a solid rebound across Europe. Data overnight showed steady inflation in Japan – ex-fresh food held at an expected-0.9% YoY, ex-fresh food and energy held at 0.3% YoY (expected 0.4%) – and growth in the U.K. accelerated slightly from 0.4% in 3Q to 0.5% QoQ to close out 2017. After this morning’s miss for headline GDP, yields pulled back slightly and stock futures cooled.
Yesterday’s Trading Activity – Eventful Day for Markets as Investors Digested the ECB Decision and Dollar Fluctuations: The ECB’s decision and moves in European assets were the markets’ major focus for most of Thursday while U.S. markets reflected a disparate response to the activity across the Atlantic. ECB President Draghi said growth was better than expected to close out 2017 which has lifted the ECB’s confidence that inflation will pick up. However, he still believes inflation is currently dependent on monetary policy and said he doesn’t expect a rate hike this year (more below). Investors in European assets responded to the full decision by selling European stocks, sending the Euro above $1.25 for the first time since December 2014, and pushing regional sovereign yields sharply higher. On an intraday basis, the German 10-year yield touched 0.64%, its highest level since 2015. In the U.S., the Dollar sold off to hit a new low since 2014 before later spiking on comments from President Trump. The President said, “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar,” adding that Mnuchin’s earlier comments that a weaker Dollar was good for the U.S. “were taken out of context.” After a roller coaster of a day, the U.S. currency ended nearly unchanged. Treasury yields initially marched higher in lockstep with their European counterparts but ultimately diverged, turning lower and finishing near their lows of the day. The 2-year yield added 0.6 bps while the 10-year yield fell 2.6 bps to 2.62%. Earlier, the 10-year yield broke above 2.67%, its highest mark since July 2014. After spending most of the day at record levels, U.S. stocks closed mixed with the Dow and S&P (barely) making new record levels. Energy was the biggest drag on the indices after oil prices pulled back from record levels on the Trump-driven Dollar jump.
Draghi Discussed the Euro, Expects Better Growth and a Pick-Up for Inflation, But Sees a Very Slim Chance of a 2018 Rate Increase: As expected, the ECB left its current policy unchanged and the official statement was hardly different from December. In his press conference, ECB President Draghi spent a measurable amount of time discussing the common currency. As he has a couple of other times recently, Draghi said volatility in the Euro was a source of uncertainty worthy of monitoring because of its importance to growth and inflation. However, some analysts made the distinction that him commenting on volatility instead of the absolute level as less dovish than he could have been. On the economy, Draghi called growth “robust” and continued to see it as broad based following a better-than-expected close to 2017. The better growth has “strengthened further [the ECB’s] confidence that inflation will converge to close to but below 2 percent.” However, he also noted an ample degree of stimulus was still needed to boost inflation as domestic price pressures remained muted. As to what that means for future policy shifts, Draghi said he sees very little chance of a rate increase in 2018 (markets weren’t expecting one) which was potentially the most dovish data point of the entire decision. He added that “the discussion hasn’t really started” on phasing out QE and clarified that the mention in the December Minutes simply indicated they discussed that they may soon begin the discussion.
New Homes Sales Slowed More than Expected in December: As was the case with December’s existing home sales released on Wednesday, sales of new homes in the final month of 2017 eased more than expected and a November spike was not as large as initially estimated. Total sales for December, which were expected to fall 7.9% MoM, dropped a larger 9.3% and November’s 17.5% surge was reduced to 15.0%. Despite the small prior month revision, November’s annualized pace of 689k remains the strongest of the cycle. Also similar to the activity in existing home sales, the weakness was broad based. There were roughly 10% declines in the Midwest, South, and West and a smaller pullback of 2.4% in the Northeast. A combination of inventory growth and the slower monthly sales pace helped push the months’ supply up to 5.7 months and back towards the high end of the range since 2014. Nonetheless, the median price inched higher to $335.4k, a new record high. However, because of a large price jump in December 2016 the YoY rate of appreciation slowed to 2.6%. Even with the MoM disappointment, sales remained 14.1% higher than a year ago and, paired with continued strength in builder confidence, should help keep sales positive to start 2018.