Campaign Promises Scrapped; Nothing Has Changed

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This article will review the shortened week the markets had. The stock market had a rough week as the S&P 500 was down 1.21%. The ten-year bond yield had a sharp decline from 2.3822% to 2.2374%. The dollar index fell modestly from $101.18 to $100.48. It was certainly a week where the ‘risk off’ trade was in play due to economic weakness.

This article will touch on the latest economic results, earnings results, and the comments President Trump made to the Wall Street Journal about monetary policy.

Economic Results

The best summary of the economic data can be seen in the chart below. As you can see the blue-chip consensus for Q1 GDP growth fell to 1.4%. It’s been a straight path lower for GDP estimates as they’ve almost been cut in half since late-December. The stock market had been ignoring this until lately as its down 3% since March 1st. The bond market started pricing in lower growth on March 13th as the ten-year yield has fallen about 39 basis points since then. The Atlanta Fed’s forecast is more bearish than the blue-chip consensus as it fell from 0.6% to 0.5%. The decline came because the weak retail sales and Consumer Price Index reports knocked down the expectation for consumer spending growth from 0.6% to 0.3%. Even the uber-bullish NY Fed’s forecast fell from 2.8% to 2.6%. It’s Q2 forecast fell from 2.6% to 2.1% signaling next quarter will also be weak.

The two positive economic reports this week were the University of Michigan consumer sentiment report and the jobless claims report. As you can see from the chart below, the current conditions index reached 115.2 which is the highest rating since 2000.

The overall index rose from 96.9 to 98.0. The partisan divide also shrunk as the Democrat index rose 7 points and the Republican one fell 7 points. This makes sense as the election wounds begin to heal. As we saw with the Atlanta Fed GDP Now forecast, this optimism hasn’t led to retail sales growth.

As you can see from the chart below, the jobless claims dipped lower beating expectations for 245,000 as they came in at 234,000.

This strengthening in the labor market is counter to the 98,000 jobs created in March which was a weak number. The BLS March report may have resulted from the uncertainty created from the failed healthcare reform and future economic stimulus. It’s tough to make a long-term conclusion on the labor market based off examining recent data.

Earnings Reports

Besides optimism about the Trump administration, the stock market has also rallied in the anticipation of earnings growth. There was an earnings recession in 2015 and 2016 as the industrials and energy firms lead results lower. Q1 earnings are expected to grow 9.2%.

2017 earnings growth is being boosted by strong year over year growth in the energy and materials sectors.

With the Fed announcing it will pause its rate hikes when it unwinds the balance sheet, the financials may miss expectations. However, the multinationals will receive a tailwind from a declining dollar if its decent continues.

Some of the financial companies reported earnings this week. One of the notable reports was from JP Morgan. The firm earned $1.65 which beat estimates by 13 cents. Even with this beat and the stock being down almost 9% from its March 1st high, the stock fell 1.17% on the day. One of the reasons why the stock may have fallen is highlighted in the slide below.

As you can see, the 5% increase in expenses was driven by auto lease depreciation. The $380 million credit cost increase was driven by a write-down in the student loan portfolio. JP Morgan is seeing weakness in the two largest bubbles in the economy. The auto loan and student loan bubbles will cause significant cost increases for the bank in the future as they unwind.

President Trump Likes Low Rates

President Trump made three major comments this week which affected markets. The first was that he felt the dollar is too high for American exports to compete. However, a weak dollar means the cost of living for people living in the United States increases. There is a trade-off. While there may be a short-term increase in exports as a function of a weaker dollar, the long-term trade-off is that everything imported into the United States increases in cost as a function of the dollar’s weaker purchasing power. Which makes you wonder, is the goal to improve the well-being of Americans or not?

The second point was that America won’t be labeling China a currency manipulator. A report will come out that China hasn’t manipulated its currency because doing so encourages China to resolve issues that have been plaguing the world from its neighbor, North Korea. President Trump met with President Xi Jinping where he got China to open the financial and meat industry to American exports. This news is great for global trade. Some investors were fearful Trump would spark a trade war with China, but the reverse has happened as business with China should increase after this meeting. This is another area where Trump’s campaign promise has been reversed.

The final point Trump made was that he respects Yellen and likes a low interest rate policy. Trump previously criticized both for propping up asset bubbles, but now that he is in charge he doesn’t want the bubbles to burst under his watch. He wants to be America’s cheerleader. Regardless of Trump’s wavering opinions, stocks were historically overvalued last year and still are this year. Math doesn’t have a political preference.

Conclusion

The blue-chip average forecast is expecting just 1.4% GDP growth. If the GDP Now’s forecast of 0.5% growth comes true, it will be the lowest growth quarter where the Fed has raised rates since 1980. This may be why Trump says he favors low interest rates. If interest rates go higher, the student loan and auto loan bubbles will burst. According to JP Morgan’s latest report, they are already showing signs of weakness.

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