Date: July 23, 2018
U.S. 4% GDP Growth Seen More ‘Luck of the Draw’ Than New Reality
The U.S. economy may have hit 4 percent growth in the second quarter, the fastest since 2014 and a feat President Donald Trump will tout as a sign of his success. It’s more like a winning hand that doesn’t come up often. Gross domestic product expanded at a 4.3 percent annualized rate in the April-June period, according to the Bloomberg survey median, with forecasts ranging as high as 5.4 percent. The stars were aligned following 2 percent growth in the first quarter: The biggest tax overhaul since the Reagan era delivered another boost to consumer spending and business investment, and the volatile categories of inventories and trade probably juiced the number — helped by a likely temporary jump in soybean exports ahead of retaliatory tariffs. While there’s much to like about the economy right now, analysts reckon the confluence of positive forces will give way to solid, albeit less spectacular, numbers in the second half and beyond as the tax stimulus begins to fade, the Federal Reserve raises borrowing costs further and the expansion ages. The burgeoning risk from tariff wars makes it even more unlikely that the torrid second-quarter performance is a new normal. “It is just the luck of the draw,” said Gus Faucher, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “In the second quarter, we had a lot of components adding to growth.” While “the economy is in good shape,” the projected surge is “temporary” and “the result of the fiscal stimulus,” he said. “It’s not a 4 percent economy.” The GDP report, due from the Commerce Department on Friday in Washington, will also include comprehensive revisions to decades of data. Beyond the headline number, the scorecard will probably be less of a barnburner. Economists looking for a better sense of underlying demand typically exclude volatile components from the GDP calculations. One gauge that eliminates trade, inventories, and government outlays — final sales to private domestic purchasers — probably grew around or slightly above the average 2.8 percent pace for this expansion, rather than being a blowout.
Trade, Political Risks May Jolt Euro-Area Economy’s Soft Landing
Euro-area growth appears to have peaked and the region could be up against threats including trade tensions, a disruptive Brexit and political shocks across the currency bloc, the International Monetary Fund warned. In its annual assessment of the euro area, the Washington-based fund said the economy remains strong, but it’s cooling, and an “array of global and domestic risks hangs over the outlook.” The latest of many warnings came as the European Unions prepares to retaliate if the U.S. decides to impose tariffs on cars. That would mark a further escalation of the tit-for-tat action that’s seen U.S. slap levies on imports from the EU and China. “Rising protectionism stands out as a major global concern,” the IMF said. “As a tail risk, protectionist measures could trigger a full-blown trade war, seriously disrupting cross border commerce and damaging the recovery.” European Commission President Jean-Claude Juncker will meet President Donald Trump in Washington next week to explore the possibility of starting negotiations on reducing car tariffs for several key trade partners. Beyond global factors, the IMF highlighted domestic risks such as policy inaction, political shocks and failure to tackle high public debt. It also cautioned that a lack of progress in Brexit negotiations “raises the risk of a disruptive exit.”
China’s Stealth Yuan Devaluation Catching Trump’s Attention
For more than a month, China seemed to be enjoying the advantage of exchange-rate depreciation without the global backlash and panicky capital outflows that accompanied the bout of yuan weakening in 2015. Then Donald Trump took issue. The U.S. president’s charges that China is “manipulating” a currency that’s been “dropping like a rock” came at the end of a six-week slide in the yuan that took it to its lowest level in more than a year against the dollar. The remarks, in a tweet and an interview with CNBC, suggested to market participants that the U.S.-China trade war is now broadening to include currencies, putting fresh scrutiny on Chinese management of the yuan. After overseeing a slide in the yuan of almost 5 percent since mid-June, the question for Chinese officials now is whether to turn to other policy measures to support growth in the face of headwinds to exports. Wang Tao at UBS Group AG is among those predicting China will use other tools than the exchange rate to “cushion the blow” from the trade war. “The central bank will work to stabilize the currency,” Wang, UBS’s head of China economic research in Hong Kong, said in a Bloomberg Television interview. “So what can China do? At this moment I think they can ease some of the tightening” in credit and fiscal policy, to support infrastructure investment, she said. China set the reference rate for the onshore yuan at 6.7593 Monday, compared with a forecast 6.7554. It was trading down 0.1 percent at 6.7935 as of 5:15 p.m. in Shanghai. Trump’s criticism aside, China watchers have highlighted how the yuan’s depreciation this time around is better understood by investors as a reflection of economic fundamentals, rather than the 2015-style shock. “A few years ago we didn’t have a story to justify the yuan weakening,” said Iris Pang, greater China economist at ING Bank in Hong Kong.
BOJ Policy Change Speculation Roils Markets
A dramatic day for Japan’s debt market saw yields surge on media reports of possible changes to the nation’s ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10-year government securities soared as much as six basis points to 0.09 percent, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day’s high. Any change to BOJ’s stimulus would be the first since 2016 when it introduced control of the yield curve in a bid to manage the impact of its bond purchases and negative interest rates. Still, profits for banks and bond traders continue to be depressed, with reports from Reuters, Asahi and Bloomberg suggesting that officials are debating ways to further mitigate the side effects. “The BOJ stepped in to hold a fixed-rate operation to make sure the market won’t be driven further by the speculation,” said Shinji Hiramatsu, general manager at the fixed-income investment department of Sompo Japan Nipponkoa Asset Management Co. in Tokyo. It won’t be easy for the central bank to wind back its stimulus policy as it may boost the yen and push down stock prices, he said