- U.S. trade deficit expected to remain wide and irk the White House
- U.S. factory orders expected to extend winning streak
- Second French presidential debate tonight is unlikely to move the polls much
U.S. trade deficit expected to remain wide and irk the White House — The market is expecting today’s Feb trade deficit to narrow mildly to -$46.0 billion from Jan’s -$48.5 billion. However, the expected deficit of -$46.0 billion would still be substantially wider than the 12-month trend average of -$42.1 billion.
The good news for the U.S. trade deficit is that exports showed back-to-back monthly gains in Dec-Jan totaling +3.3% to post a new 2-year high of $192.1 billion. However, imports have been even stronger and rose by a total +6.2% over the last six months to post a new 2-year high of 240.6 billion in January. On a year-on-year basis, imports in January showed a +8.3% y/y gain, stronger than the +7.4% y/y gain seen in exports. The U.S. trade deficit this year is likely to remain high due to the generally strong dollar, which depresses exports and boosts imports.
The U.S. trade deficit report has taken on much more political importance since the Trump administration is on the war path against nearly all of the countries that run large trade surpluses against the U.S. In January, the U.S. had trade deficits of -$31.3 billion with China, -$5.5 billion with Japan, and -$4.9 billion with Germany. With its NAFTA partners, the U.S. in January had trade deficits of -$3.9 billion with Mexico and -$3.6 billion with Canada.
The wide U.S. trade deficit continues to be a bearish underlying factor for the dollar since about $1.2 billion worth of dollars flow overseas every calendar day. However, those excess dollars are a drop in the bucket for the FX markets, which trade an average of $5 trillion worth of currencies every day with 88% of that trade involving U.S. dollars, according to the BIS. That illustrates why the U.S. trade deficit in the end has only a minor negative impact on the dollar.
U.S. factory orders expected to extend winning streak — The market will be watching to see if today’s factory orders data provides some hard data to suggest that the U.S. manufacturing sector is improving as much as the confidence measures such as the ISM. Yesterday’s March ISM manufacturing index fell by -0.5 points to 57.2, but was still up by 5.2 points from its pre-election level and was only -0.5 points below Feb’s 2-1/2 year high of 57.7.
The market consensus is for today’s Feb factory orders report to show a +1.0% gain, adding to Jan’s gain of +1.2%. Factory orders excluding transportation in February rose by only +0.3%. Expectations for an increase in today’s factory orders report are based in part on the already-reported news that Feb durable goods orders rose by +1.7% headline and +0.4% ex-transportation. In addition, the ISM manufacturing new orders sub-index in March fell by -0.6 points but remained strong at 64.5, indicating strong industry confidence about manufacturing orders.
The factory orders data has already improved substantially in recent months. Factory orders ex-transportation on a month-on-month basis have risen for six consecutive months. On a year-on-year basis, factory orders ex-transportation in Feb improved to a 5-year high of +6.0% y/y.
Second French presidential debate tonight is unlikely to move the polls much — French presidential candidates this evening will hold their second debate of the election season. The third and final debate for the first round of voting is tentatively scheduled for April 20, just three days before that first round of voting on April 23.
Unlike the first debate two weeks ago that featured only the top five candidates, this evening’s debate will feature all eleven candidates, which could make it difficult for any single candidate to shine through. Unless there is a gaffe by one of the two front-runners, independent Emmanuel Macron or National Front leader Marine Le Pen, there may not be much impact on the polls from this evening’s debate.
The polls have not shifted much in the past several weeks. A BVA poll released on Saturday showed Mr. Macron with 25% voting support in the first round, following by Ms. Pen at 24%, and Republican Francois Fillon at 19%. In the second-round run-off vote on May 7, the poll showed Mr. Macron with 60% of the vote compared with 40% for Ms. Le Pen, assuming those are the two candidates who make it into the second round.
The betting odds in the past week have faded slightly for Mr. Macron to 66% and are little changed for Ms. Le Pen at 29%, according to PredictIt.org. The odds of Marine Le Pen becoming the next French president are high enough that the markets remain on their guard given the Brexit and Trump upsets.
The French-German 10-year bond yield spread has become a proxy for the French election since a win by Ms. Le Pen would likely push French and peripheral Eurozone bond yields sharply higher on concern that France might leave the EU. The French-German 10-year yield spread has fallen by -15.0 bp to 64.2 bp from the 4-1/2 year high of 79.2 bp posted on Feb 21. However, the spread is still up by 34 bp from the average of about 30 bp seen in 2015-16 before the French election concerns emerged in force.
The good news for Europe is that if Ms. Le Pen loses in the run-off race on May 7, then French bond yields and the yields of peripheral Eurozone countries should drop sharply, thus producing some benefits for the Eurozone as a whole and substantially reducing risk. The bad news of a Le Pen victory for the markets, of course, would be a long period of uncertainty about whether France might leave the Eurozone.
