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  • U.S. GDP expected to hold up in Q1 but then fade in 2H-2019
  • U.S. consumer sentiment remains generally strong despite mild set-back in April
  • Japan refuses to link a currency agreement to a trade agreement 
  • Markets are hoping for a US/Chinese trade agreement in two weeks
 

U.S. GDP expected to hold up in Q1 but then fade in 2H-2019 -- The consensus is for today's Q1 GDP report to improve slightly to +2.3% (q/q annualized) from +2.2% in Q4.  Expectations for today's Q1 GDP report have improved substantially just in the past several weeks from earlier expectations of about +1.5% due to the recent release of stronger economic data.  In particular, March retail sales surged by +1.6% m/m.  Even with that late surge in retail sales, however, the consensus is for today's Q1 personal consumption to show an increase of only +1.0% q/q annualized, which would be the weakness performance in a year.

Q1 GDP is expected to be boosted by rising inventories and by a solid net export figure.  However, there will be negative payback in the next two quarters because inventory growth has outstripped demand since mid-2018 and inventories will have to be cut in coming months, which will hurt GDP growth in Q2 and Q3.

The Atlanta Fed's GDPNow forecast for Q1 GDP growth of +2.7% is substantially stronger than the consensus of +2.3%.  GDPNow is forecasting the following sector contributions to GDP:  +0.77 percentage points from personal consumption, +0.12 points from equipment spending, +0.31 points from intellectual property products, , -0.01 point from nonresidential structures, +0.05 from residential investment, +0.54 from government spending, +0.50 points from net exports, and +0.39 points from the change in private inventories.  

Looking ahead, the consensus is for U.S. GDP growth to remain relatively strong at +2.5% in Q2, but then slide to +2.2% in Q3 and +2.0% in Q4.  On a calendar year basis, the consensus is for GDP to slide from 2018's strong level of +2.9% to +2.4% in 2019, +1.9% in 2020 and +1.8% in 2021.  The market is expecting U.S. GDP to slowly fall back to its long-term potential growth rate as the effects fade from the 2018 tax cut and as global economic growth remains tepid.

U.S. consumer sentiment remains generally strong despite mild set-back in April -- The consensus is for today's final-Apr University of Michigan U.S. consumer sentiment index to be revised slightly higher by +0.1 point to 97.0, which would leave the index down by -1.4 points from March rather than the preliminary decline of -1.5 points.  The index in early April fell by -1.5 points but that followed the solid increases of +2.6 points in February and +4.6 points in March. 

U.S. consumer confidence  improved substantially in Q1 due to (1) the sharp rally in the U.S. stock market, (2) the decline in interest rates and mortgage rates after the Fed switched to a neutral policy and gave up its rate-hike regime, (3) continued strength in the U.S. labor market, and (4) improved household finances as home prices and wages continued to rise.

Japan refuses to link a currency agreement to a trade agreement -- Japanese Finance Minister Aso on Thursday met with Treasury Secretary Mnuchin but warned that Japan will not agree to link a currency agreement with a trade agreement.  Japan apparently does not want U.S. demands for a currency agreement to interfere with its hopes to conclude a trade deal with the U.S. fairly quickly on agriculture and autos, thus averting President Trump's threat to slap tariffs on imported autos.

President Trump by May 17 is due to make a decision on the Commerce Department's likely recommendation to go ahead with tariffs on imported autos based on national security grounds.  However, Mr. Trump has the option of delaying the decision if he wishes.  President Trump's threat of tariffs on imported autos is mainly aimed at applying pressure to Japan and Europe in their respective bilateral trade talks with the U.S.

President Trump and Japanese Prime Minister Abe will meet today in Washington for a summit.  The two main items on the agenda are trade and North Korea.  Mr. Abe will continue his efforts to try to placate President Trump and convince him not to slap tariffs on imported Japanese autos, which would be a disaster for the Japanese auto industry.

Markets are hoping for a US/Chinese trade agreement in two weeks -- The White House earlier this week confirmed recent media reports that Lighthizer-Mnuchin will travel to China for trade talks next week, followed by a visit to Washington in the following week by Chinese Vice Premier Liu.  

The markets are hoping that media reports will prove true that the U.S. and China are looking to finalize a trade agreement when Mr. Liu is in Washington in two weeks, thus paving the way for a Trump-Xi signing summit in late May.  

The markets will be very relieved if the U.S. and China sign a trade agreement and remove at least some of the penalty tariffs that were imposed last year.  The Trump administration is reportedly willing to remove the second batch of tariffs on $200 billion of Chinese goods but intends to keep in place the first batch of tariffs on $50 billion of Chinese goods.  The U.S. is reportedly pressuring China to remove, or at least shift, the tariffs that it slapped on U.S. agriculture products as retaliation for Mr. Trump's first batch of tariffs on Chinese goods.  The U.S. cannot realistically declare victory on a trade agreement if China still has major penalty tariffs on U.S. agriculture products.

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