- Kudlow tries to cool market expectations for near-term US/Chinese trade agreement
- U.S. core PCE deflator expected to remain near the Fed’s inflation target
- U.S. consumer sentiment expected to match the preliminary-March +4.0 point increase
- U.S. new home sales expected to improve
- PM May plans Friday vote on the Brexit divorce plan
Kudlow tries to cool market expectations for near-term US/Chinese trade agreement — White House economic advisor Kudlow on Thursday tried to cool market expectations for a near-term US/Chinese trade agreement by saying that the agreement is “policy and enforcement dependent” and that “If it takes a few more weeks, or if it takes months, so be it.”
Mr. Kudlow made the comments in a prepared speech, which means the wording was purposeful and was not off the cuff. Mr. Kudlow might have been trying to prevent the U.S. stock market from getting its hopes up too much for a final agreement from this round of face-to-face talks, which could lead to disappointment and a potential nose-dive next week after Chinese Vice Chair Lieu leaves Washington. Mr. Kudlow seems to be trying to encourage the markets to wait patiently for weeks or even months for an agreement.
In any case, the U.S. and China are both saying that an agreement is not imminent. Mr. Kudlow on Thursday said, “We’re getting close, but we are not there yet.” Chinese Ministry of Commerce Spokesman Gao on Thursday said there has been some progress recently with top-level phone calls but “there’s still a lot of work to be done.”
USTR Lighthizer and Treasury Secretary Mnuchin will hold a full day of trade talks today in China with their counterparts. Chinese Vice Premier Liu will then travel to Washington next week to complete this round of talks.
U.S. core PCE deflator expected to remain near the Fed’s inflation target — Regardless of all the Fed’s recent talk about low inflation, the market consensus is for today’s Jan core PCE deflator to be unchanged from Dec at +1.9% y/y. That would leave the Fed’s preferred inflation measure just 0.1 point below the Fed’s +2.0% inflation target. The 3-month annualized figure for the core PCE in fact is right at +2.0%. The consensus is for today’s headline Jan PCE deflator to ease to +1.4% y/y from Dec’s +1.7%.
While today’s core PCE deflator is expected to be unchanged at +1.9% y/y, the markets have been pushing inflation expectations lower. The 10-year breakeven inflation expectations rate on Wednesday fell to a new 2-month low of 1.83% before rebounding upward to 1.86% on Thursday. The breakeven rate has fallen by about 10 bp in the past two weeks because the market is expecting a weaker economy and thus lower inflation.
U.S. consumer sentiment expected to match the preliminary-March +4.0 point increase — Today’s final-March University of Michigan U.S. consumer sentiment index is expected to be unrevised at 97.8, which would leave the index up by +4.0 points from February. The index fell late last year and posted a new 2-1/2 year low of 91.2 in January, but then rebounded higher by a total of +6.6 points in Feb-March.
The sharp Oct-Jan drop in consumer confidence was due to the sharp sell-off seen in the U.S. stock market in late 2018 and the slowing global and U.S. economies. However, U.S. consumer confidence started recovering in February thanks to the (1) upward rebound in the U.S. stock market in Q1, (2) continued strength in the labor market, (3) the Fed’s dovish shift to a neutral policy, and (4) the sharp drop in interest rates including mortgage rates.
U.S. new home sales expected to improve — The consensus is for today’s Feb new home sales report to show a +2.1% increase to 620,000 recovering somewhat after Jan’s -6.9% decline to 607,000. The existing home sales report for February has already been released and showed a +11.8% surge to a 1-year high of 5.51 million units, which bodes well for today’s new home sales report. New home sales should also receive a boost from the sharp drop in the 30-year mortgage rate to a 13-month low of 4.35% at the end of February home-sales reporting month, which was down by -59 bp from last November’s 8-year high of 4.94%. Since the end of February, the 30-year mortgage rate has plunged by another -29 bp to a 14-month low of 4.06%.
PM May plans Friday vote on the Brexit divorce plan — UK Prime Minister May is expected to put the Brexit divorce bill to a vote today. Ms. May’s idea is to separate the divorce legislation from the non-binding Political Declaration on the future UK/EU trade relationship, thus making it a substantially different bill that can get past Speaker Bercow’s refusal to allow a third vote on Ms. May’s plan. Only the divorce bill needs to be passed by Parliament to qualify for the EU’s deadline extension to May 22.
While the procedural trick might work to get a vote, Ms. May still does not seem to have the votes lined up to get the bill passed. As usual, everything keys on the Northern Ireland DUP party, which is so far still opposed to Ms. May’s EU divorce agreement. Yet if Ms. May could get the DUP on board with her plan, she might be able to convince enough of the hardline Brexiteers in her party to support her plan to push it over the line.
Ms. May still has until the April 12 deadline to get a Brexit separation bill passed. If no bill is passed by April 12, then the UK will either be forced to request a long Brexit deadline extension or the UK will be ejected from the EU in a chaotic no-deal Brexit on April 12. The most likely outcome still seems to be a UK request for a long Brexit extension before the April 12 deadline. Yet there is still the outside chance that Ms. May in the end might put her party first and allow a no-deal Brexit to prevent a fracturing of the Conservative Party.
