FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • After last week’s start-of-month data dump and the prior week’s executive order deluge, this week has
    been fairly quiet for U.S. investors.
  • International trade data was the only top-tier release, highlighting an improvement in the trade deficit and
    suggesting some upward revision to fourth quarter GDP. Also constructive was the sustained decline in
    initial jobless claims, which beat expectations and fell to 234k last week.
  • Rather than the data, the markets were more interested in what was being said by policymakers about
    the U.S. economy, cheering the mere mention of what was touted by the president as a ‘phenomenal’ tax
    plan. Plenty of Fed-speak also kept market participants looking for clues for the next Fed hike, but one is
    unlikely until at least mid-year.

 

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QUIET DATA CALENDAR A WELCOME CHANGE

After last week’s start-of-month data dump and the prior week’s executive order deluge, this week has been fairly quiet for U.S. investors. Markets remained fairly upbeat, on continuing hopes of corporate tax reform and relatively positive earnings, with all three major indices setting records once again on Friday morning (Chart 1). The U.S. dollar also got a modest boost, with the DXY index 1.1% higher on the week, at the time of writing.

International trade data for December was the sole top tier U.S. release leaving participants with little to chew on by way of economic data. The trade deficit narrowed to $44.3 billion from $45.7 billion in the prior month (Chart 2), beating economists’ expectations for a more modest pullback (to $45.0 billion). Exports bounced back aft er two months of contraction, while imports followed suit, in line with an acceleration in economic growth at home. This was relatively good news, pointing to a modestly smaller drag from net trade on fourth quarter GDP, but did little in the way of moving the needle.

The second-tier data was somewhat more inspiring. For one, initial jobless claims fell substantially, going against market expectations for a modest increase. The headline number fell to 234k for the week ending February 4th while the 4-week moving average declined to 244k, the lowest level since 1973. The job openings and labor turnover survey for December also painted a picture of an increasingly tight labor market, with job openings hovering around the 5.5 million mark, while the quits rate slipped only slightly to 2.0%, but remained near the cycle-high level of 2.2%.

Globally, economic data was more mixed. German industrial production hit the brakes in December, down 3% m/m. However, factory orders rebounded, up 5.2% on the month, providing some comfort that industrial production will bounce back in January. Less encouraging was the softer reading of the composite purchasing managers’ index in China which fell to 52.2 in January. While this still represents growth, it signals a slower pace at the beg inning of the year. Similarly, Australian retail sales also disappointed, falling by 0.1% in the important December shopping month.

Still, data these days often tends to play second fiddle, with policy discussion about the U.S. economy taking center stage, particularly how any of these may impact the outlook for monetary and fiscal policy. President Trump suggested recently that he will within the next two weeks announce a ‘phenomenal’ tax plan with markets already cheering the mere mention of this initiative (see Chart 1 again).

In the follow-up to the Fed’s meeting last week, the Fed’s speaking circuit was out in full force. Philadelphia Fed President Harker kicked things off, alluding to a rate increase as early as March. However, his hawkish views were offset by the Minneapolis Fed President Kashkari, who cited the slow improvement in core inflation and limited cost pressures stemming from the labor market as reasons to remain patient. Evans (Chicago) and Bullard (St. Louis) also reiterated the dovish stance later on in the week, both citing concerns around the lack of inflationary pressures. Overall, none of this changes our take on the Fed’s next move, with our baseline view seeing the Fed raise rates twice this year, with the first coming around the mid-year mark.

Neil Shankar, Economist

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