- FOMC expected to maintain a low profile
- Markets are hoping for a US/Chinese trade agreement next week
- U.S. consumer confidence expected to remain firm
- U.S. home prices expected to continue to march higher
- Q1 employment cost index expected to remain near a 10-year high
- Eurozone Q1 expected to stabilize
FOMC expected to maintain a low profile — The FOMC at its 2-day meeting that begins today is unanimously expected to retain its neutral policy and leave its funds rate target unchanged at 2.25/2.50%. The FOMC will likely want to maintain a low profile given that a US/Chinese trade agreement may be reached next week and that the Fed presumably wants to avoid any fresh criticism from President Trump. With the economy growing at a decent rate and with inflation low, the Fed can afford to bide its time and wait to see if trade tensions ease and the U.S. economy regains some momentum. If so, then the FOMC later this year might start making noises again about raising interest rates and making good on its Fed-dot forecast for one rate hike in 2020. However, the market is much more dovish than the Fed and is currently discounting 46 bp of rate cuts by the end of 2020.
Markets are hoping for a US/Chinese trade agreement next week — USTR Lighthizer and Treasury Secretary Mnuchin will be in China today to begin a new round of trade talks. Chinese Vice Premier Liu will then be in Washington next week for talks beginning on Wednesday.
Treasury Secretary Mnuchin yesterday said in a taped interview that, “We hope within the next two rounds in China and in D.C. to be at the point where we can either recommend to the president we have a deal or make a recommendation that we don’t.” That comment is consistent with recent media reports that U.S. and China officials hope to finalize a trade agreement during Mr. Liu’s visit to Washington next week, which would include a date for a Trump-Xi signing summit in late May or June.
The last issues reportedly include enforcement and what penalty tariffs will be left in place even after an agreement. Recent reports suggest that the U.S. is willing to remove the second round of tariffs on $200 billion of Chinese goods but wants to leave in the place the first round of tariffs on $50 billion of Chinese goods. The U.S. is also reportedly trying to get China to switch its retaliatory tariffs to products other than agriculture so President Trump can pitch his trade deal to the U.S. agriculture industry as a win.
U.S. consumer confidence expected to remain firm — The consensus is for today’s Conference Board Apr U.S. consumer confidence index to show a +2.6 point increase to 126.7, recovering part of March’s -7.3 decline to 124.1. The University of Michigan’s U.S. consumer sentiment index for April has already been released and that report showed a -1.2 point decline to 97.2, undercutting expectations for today’s Conference Board report. The markets are hoping that U.S. consumers in April will extend their March retail-sales spending spree of +1.6% m/m.
U.S. consumer confidence remains relatively strong and is hovering just mildly below recent major highs. The Conference Board’s index in March was only -13.8 points below last October’s 18-year high of 137.9. U.S. consumer confidence recovered in early 2019 due to (1) the sharp rally in stocks to new record highs, (2) the Fed’s shift to a neutral policy and market expectations for at least one rate cut through the end of 2020, (3) rising income and housing prices, and (4) the strong U.S. labor market. Mildly negative factors include higher gasoline prices and political uncertainty in Washington.
U.S. home prices expected to continue to march higher — The consensus is for today’s Feb S&P CoreLogic composite-20 home price index to show an increase of +0.3% m/m and +3.1% y/y versus the Jan report of +0.1% m/m and +3.5% y/y. Last week’s FHFA home prices index report for February showed an increase of +0.3% m/m, which supported expectations for an increase in today’s Composite-20 report.
U.S. home prices are expected to get a boost in early 2019 from improving home sales and the decline in mortgage rates. Existing home sales in February surged by +11.2% to a 5-month high of 5.48 million units before settling back by -4.9 to 5.21 million in March. The current 30-year mortgage rate of 4.30% is up by +23 bp from the early-April 15-month low of 4.07% but is still far below last November’s 8-year high of 4.94%.
Q1 employment cost index expected to remain near a 10-year high — The consensus is for today’s Q1 employment cost index (ECI) to remain strong at +0.7% q/q (+2.8% annualized), which would be unchanged from Q4’s report of +0.7% q/q. On a year-on-year basis, today’s Q1 ECI is expected to edge lower to +2.8% y/y from Q4’s 10-year high of +2.9% y/y. The ECI is seeing strength due to the strong U.S. labor market, which is forcing employers to compete for employees. The higher ECI is positive for consumer income and spending but is negative for corporate profits.
Eurozone Q1 expected to stabilize — The consensus is for today’s Eurozone Q1 GDP to edge higher to +0.3 q/q (+1.2% annualized) from the Q4 report of +0.2% (+0.8% annualized) and the Q3 report of +0.1% (+0.4% annualized). On a year-on-year basis, the consensus is for Q1 GDP to be unchanged at +1.1% y/y. The markets are hoping that the worst is past for the Eurozone economy, which has recently been hit by (1) weakness in the German industrial sector in Q4, (2) the Yellow Vest protests in Paris, (3) last year’s surge in Italian bond yields on the populist government’s insistence on boosting its deficit, (4) US/EU trade tensions, and (5) Brexit uncertainty. Looking ahead, the consensus is for Eurozone GDP to improve to +0.4% q/q (+1.6% annualized) in 2H2019 as the Eurozone economy recovers from the one-time negative factors seen in late 2018. On a calendar year basis, the consensus is for weak GDP this year of +1.1%, but then for an improvement to +1.4% in 2020 and 2021.
