A surprise in the making?

The Week Ending Friday April 27th 2018

If panic about WW3 over Korea was bad for markets, the prospect of peace in Korea should be good. The Fed, of course, won’t like such good news and will be happier with its tightening bias as a result. GDP data on Friday might also mean the Fed will tighten more than expected.

Q1 GDP better than usual, inflation higher too

The US RGDP print was better than expected, the NGDP one was also good YoY at 4.8% even if QoQ at 4.3% was a bit lighter than recent readings. The first quarter has traditionally been weak, but was much less weak than usual in 2018. The 2018Q1 PCE Price Index was also strong QoQ – both headline and core – indicating that March’s figure (out on Monday) will be strong. This particular data point, specifically targeted by the Fed, could mean the FOMC meeting on Tuesday/Wednesday might be a lot more hawkish than currently expected.

The USD may be giving hints of tighter monetary policy to come as it crept up during the week. Partly this was down to weakness in GBP thanks to some weak GDP and other data – no surprise given the recent trend in NGDP alongside insane tightening action and talk from Governor Carney and most of his Monetary Policy Committee, and increasing concerns from business about a clean break/cliff edge/car crash Brexit.

Fixed income markets have been pointing to higher nominal growth for a while as the 10-year bond and breakeven inflation rates pushed higher. Last week the 10yr bond yield fell back below 3% but only just. Our take on the yield curve is that flatter is fine as long as it is at higher levels overall.

Equities were flat over the week after a tech-induced swoon, partly driven by earnings worries, was followed by earnings that were overall OK.

Data and surveys

Apart from the 2018Q1 GDP data the biggest news was March Durable Goods orders. At the underlying level these were weak and may indicate a growth slowdown ahead. Current month surveys were mostly as expected.

Next week we get many more surveys of April activity as well as those March PCE and PCE PI figures. At the end of the week there is also the April payrolls, wages and unemployment data. Our preferred measure of wages, Average Weekly Earnings, has been rising strongly in the last few months, so April data will be interesting.

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