- Beige Book expected to show slightly better U.S. economic conditions
- U.S. trade deficit expected to expand
- U.S. and Japan set parameters for trade talks
- Chinese economic data is stronger than expected with Q1 GDP at +6.4%
Beige Book expected to show slightly better U.S. economic conditions — The FOMC today will release its Beige Book survey of the U.S. economy for the period of March through early April. The last Beige Book report, released on March 6, found soft economic conditions and said that, “Economic activity continued to expand in late January and February, with ten Districts reporting slight-to-moderate growth, and Philadelphia and St. Louis reporting flat economic conditions.”
The markets are expecting today’s report to find slightly better conditions in March than were seen over the winter when the economy suffered from a slump in consumer spending and from the U.S. government shutdown that lasted from December 22 through January 25. Over the 4-month period of November through February, U.S. retail sales showed a net decline of -1.1%, illustrating how U.S. consumers went on spending strike.
However, the University of Michigan’s U.S. consumer sentiment index improved by a net +5.6 points in Q1 thanks mainly to the rally in the U.S. stock market, which boosted market hopes for an improvement in consumer spending starting in March. Indeed, tomorrow’s March retail sales report is expected to show a solid gain of +1.0% m/m (+0.7% ex-autos).
Manufacturing confidence also improved in March, boosting hopes for an improvement in the manufacturing sector. The ISM manufacturing index in March rose by +1.1 points to 55.3. However, businesses in the non-manufacturing sectors of the U.S. economy continued to express doubts about the economy in March as the ISM non-manufacturing index fell by -3.6 points to 56.1, more than reversing Feb’s +3.0 point increase to a 4-month high of 59.7.
Hopes for improved U.S. economic data going into spring have caused the market to trim expectations for Fed rate cuts over the next two years. The market was fully expecting two cuts as recently as two weeks ago in late March. However, the market is now discounting only 1.3 rate cuts through the end of 2020. Specifically, the Dec 2020 federal funds contract on Tuesday rose to a 1-month high of 2.08% (on a yield basis), reflecting expectations for an overall -32 bp rate cut by the end of 2020 from the current funds rate level of 2.40%.
U.S. trade deficit expected to expand — The consensus is for today’s Feb trade deficit to widen moderately to -$53.4 billion after the sharp narrowing seen in January to -$51.1 billion from the 10-year high of -$59.9 billion seen in December. The U.S. trade deficit has been on a widening trend over the past 1-1/2 years as export growth weakened faster than import growth.
U.S. export growth as recently as a year ago was very strong at +10.4% y/y in May 2018, but showed growth of only +3.0% y/y in the most recent trade report for January. However, imports have weakened as well and were up by only +1.6% y/y in January. U.S. trade flows continue to be buffeted by U.S. tariffs and retaliatory tariffs.
U.S. and Japan set parameters for trade talks — Talks on Monday and Tuesday between Japanese Trade Minister Motegi and USTR Lighthizer focused on the parameters of the new round of bilateral US/Japan trade talks and involved discussions of agriculture and autos. The U.S. wants wider export access to the Japanese agriculture market and wants to curb Japanese auto imports as well as force an overall decline in the U.S. trade deficit with Japan. However, Japan will likely hold the line on its vow that it will not give the U.S. any better trade terms that it gave the U.S. and Pacific Rim countries in the original Trans-Pacific Partnership (TPP) or in its recent free trade agreement with Europe.
Japan now seems willing to quicken the pace of the trade talks that were agreed to by President Trump and Japanese Prime Minister Abe last September. In the first year of President Trump’s term, Japan refused to engage in bilateral trade talks with the U.S. at all and said that if the U.S. wanted improved trade terms with Japan then the U.S. could simply rejoin the TPP. One of President Trump’s first acts as President was to withdraw the U.S. from the TPP. However, the remaining members of the TPP went ahead with the trade pact without the U.S., renaming it the Comprehensive and Progressive Trans-Pacific Partnership.
By finally agreeing to the bilateral trade talks last September, Japan is primarily trying to prevent President Trump from going through with his threat to impose tariffs or quotas on imported autos. President Trump by next month is due to make a decision on the Commerce Department’s likely recommendation to go ahead with tariffs on imported autos on national security grounds. However, the White House has the option to delay the decision if it wishes. President Trump’s threat of tariffs on imported autos is mainly aimed at applying pressure to Japan and Europe in the respective bilateral trade talks.
Chinese economic data is stronger than expected with Q1 GDP at +6.4% — Last night’s Chinese Q1 GDP was unchanged from Q4 at +6.4% y/y, which was stronger than market expectations for a decline to +6.3%. The Q1 GDP in any case remained at Q4’s 10-3/4 year low. The Q1 GDP report of +6.4% was towards the upper end of the government’s GDP target range of 6.0%-6.5%. Looking ahead, the consensus is for Chinese GDP growth to ease to +6.2% for the remaining three quarters of 2019. Last night’s March retail sales report of +8.3% year-to-date was in line with market expectations and up from Feb’s +8.2%. However, the March industrial production report of +6.5% year-to-date was substantially stronger than market expectations of +5.6% and was up from Feb’s +5.3%.
