U.S. Growth of 3.2% Tops Forecasts on Trade, Inventory Boost
U.S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset a slowdown in consumer spending, bolstering hopes that growth is stabilizing after its recent soft patch. Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months. But underlying demand was weaker than the headline number indicated. Consumer spending, the biggest part of the economy, rose a slightly-above-forecast 1.2 percent, while business investment cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective. Even so, the data showing faster growth and tame inflation helped push U.S. stock futures higher and Treasury yields lower on Friday. The first acceleration in GDP since mid-2018 reflected the largest combined boost since 2013 for two typically volatile components — inventories and trade — that could weigh on the economy later in the year. While steady wage gains and the Fed’s forbearance on interest-rate hikes will help make the expansion the nation’s longest on record in July, the fading impact of tax cuts and a global slowdown mean President Donald Trump’s goal of sustained 3 percent growth will still be difficult to reach. While 3.2 percent is a “great number,” consumer spending “has to get stronger for the economy to remain in an expansion,” said Michael Gapen, chief U.S. economist at Barclays Plc. “We think it will, but it’s not a silver lining. Underneath the hood, household spending was soft and further expansion is going to require households to get back to a normal space of spending.” The growth pickup mainly reflected a downturn in imports, greater state and local government spending, and rising inventories that were partially offset by slower consumer spending and fixed investment, the Commerce Department said in a statement Friday with the GDP data.
Turkish Removal of Hawkish Rate Pledge Worsens Lira’s Plight
Turkey’s central bank dropped a commitment to deliver further monetary tightening if needed as it extended its interest-rate pause to seven months. The lira tumbled to its weakest since October. The Monetary Policy Committee led by Governor Murat Cetinkaya tweaked its forward guidance in a statement accompanying its decision on Thursday, saying its action “will be determined to keep inflation in line with the targeted path.” The MPC kept the benchmark rate at 24 percent, in line with forecasts. Investors interpreted the change in language as a dovish turn by the central bank. The lira depreciated as much as 1.5 percent and traded 1.3 percent lower at 5.9512 per dollar at 2:46 p.m. in Istanbul. “This is much worse than expected and supports the view that policy has gone off the rails,” said Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co. “This signals that any orthodoxy at the central bank has effectively been crushed, since no sane central bank would be leaning dovish at a time like this for Turkey.” Cetinkaya has pledged to wait for a “convincing” inflation slowdown before cutting rates, but has been stymied by the weaker lira. Investors have soured on Turkey’s currency as the central bank struggled to explain moves in its reserves, fueling concern about the state of the nation’s finances. The lira is down over 6 percent so far this month against the dollar in the worst performance globally. “The challenging economic environment is compounded by poor policy and tone-deaf statements,” Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said by email. “The risk is that the central bank is forced to hike rates again as the pass-through from the weaker lira prevents stabilization.” The downturn, coupled with a runup in food prices and the highest unemployment since 2009, undermined support for President Recep Tayyip Erdogan, whose party suffered unexpected losses in Turkey’s major cities in March 31 municipal elections. Tensions have been high since then as the ruling AK Party is contesting its defeat in commercial hub Istanbul, claiming widespread irregularities and demanding a new vote. “Turkey needs to keep a tough stance and not ‘give in’ to another short-term credit boost in order to come out of the recession, however tempting that politically may be after the local elections,” said Morten Lund, analyst at Nordea Bank AB.
Surprise Drop in Japan Factory Output Adds to Warning Signs
Japan’s factory output unexpectedly fell in March, raising the likelihood that gross domestic product shrank during the first quarter. The reading on the world’s third-largest economy comes a day after South Korea, a bellwether for world trade and technology, surprised markets in reporting its biggest contraction of GDP in a decade, signaling that the worst of the global slowdown may not have passed. Japan needs to see a healthy recovery in exports and industrial output ahead of a long-delayed sales-tax increase set for October. The Bank of Japan again highlighted the risks from the hike in guidance on interest rates after its policy meeting Thursday, pledging to keep rates extremely low through at least spring 2020 in the face of “high uncertainties.” Japan’s factory output slid 0.9 percent in March from a month earlier, compared with the median estimate of economists of no change, according to data from the trade and industry ministry Friday. Production during the first quarter slid 2.6 percent from the previous three months, the biggest decline in nearly five years. Separately, core inflation in Tokyo, an early indicator of nationwide prices, accelerated to 1.3 percent in April, the highest in four years. Economists had estimated 1.1 percent. Inflation in Tokyo was expected to have benefited as the prices of food and restaurant meals went up at the start of the new fiscal year on April 1. Retail sales rose 0.2 percent in March from the previous month, slightly better than expectations from economists for no change, while the jobless rate ticked up to 2.5 percent. The global slowdown, trade tensions and Japan’s sputtering growth are all contributing to speculation that Prime Minister Shinzo Abe might postpone the tax increase for a third time. The last increase, in 2014, sent consumption into a tailspin, triggering a contraction in the economy. Meanwhile, Japan is trying to fend off possible U.S. auto tariffs in bilateral trade negotiations with the U.S. this week. Abe is scheduled to meet President Donald Trump on Friday, while Finance Minister Taro Aso has been in talks with Treasury Secretary Steven Mnuchin and Economy Minister Toshimitsu Motegi held discussions with Trade Representative Robert Lighthizer.
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