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Q1 Growth Slower Than Expected



Out of the shoot at 8:30AM EST this morning, the advance Q1 GDP expected by most economists up 1.1%, as reported +0.7%. The GDP quarterly price index +2.3%; real consumer spending expected +0.7% was weak at +0.3%. The price index was a little hotter than 2.0% expected. The reaction to the report sent MBS prices down 16 bps from yesterday’s close; the bellwether 10 yr note yield up 2 bps to 2.33%. Although GDP didn’t match expectations, it was much better than the Atlanta Fed’s GDPNow that yesterday showed Q1 growth at 0.2%. Recently there has been more attention to the GDPNow because it calculates GDP growth on a continuing basis using key reported data as it is reported to make the assessments. Q1 now has a recent history of being the weakest quarter every year for the last four years; that it was weaker than economists were saying it would be doesn’t carry much weight because of its recent history.

Also at 8:30 Q1 employment cost index; expected up 0.6% increased to +0.8%; yr/yr employment costs +2.4% from +2.2% in Q4 2016. Employment cost index is a measure of total employee compensation costs, including wages and salaries as well as benefits. The employment cost index (ECI) is the broadest measure of labor costs.

The GDP and employment cost data suggest a little increase in inflation with labor costs increasing more than forecasts and the GDP price index higher than in Q4 2016. Countering that real consumer spending was lower than forecasts at +0.3% against +0.7% thought. Consumer spending is by far the worst showing since no change in fourth-quarter 2009. Weakness in consumer spending is strongly associated with the recession but not in other data in the report. At a 13.7% pace, residential investment posted a second straight very strong quarter. And in a rare show of strength, nonresidential investment, which has been subdued, jumped at a 9.4% with both structures and equipment showing unusual strength. A surge in mining investment is a standout of the report.

Data from the eurozone this morning; consumer price index rose 1.9% y/y in April, beating estimates after 1.5% inflation in March. The core CPI was up 1.2% y/y in April (0.7% prior). German retail sales increased by 0.1% m/m in March (2.3% y/y), exceeding forecasts after a 1.1% jump in February. Spain’s GDP increased by 0.8% q/q in the first quarter (3.0% y/y), topping estimates following 0.7% growth in Q4. French Consumer Spending was down 0.4% m/m in March, badly missing expectations after a 0.7% decline in February. The U.K.’s GDP was up 0.3% q/q in the first quarter (2.1% y/y), missing estimates after 0.7% growth in Q4. Europe with mixed data; yesterday the ECB left its QEs and interest rates unchanged; markets were thinking the bank would begin commenting about cutting back and possibly thinking about increasing its -04% base lending rates soon. It didn’t happen; the ECB still fretting that inflation levels were still too low at 1.5%.

Market fears are dissipating quickly now with geopolitical tensions relaxing presently. The stock market has done well this week. The VIX index, the measurement of market volatility, has dropped to a three-year low yesterday. Low volatility is one buy signal for equity market investor and a slight drag on fixed income investments that usually benefit when volatility increases.

At 9:30 the DJIA opened -5, NASDAQ +22, S&P +2. 10 yr note at 9:30 +2 bp to 2.32%. FNMA 3.5 30 yr coupon -6 bps from yesterday’s close and +6 bps from 9:30 yesterday.

At 9:45 April Chicago purchasing mgrs. index was expected at 56.5 from 57.7 in March; as reported the index increased to 58.3. Next week the national ISM manufacturing index will be released, but this regional improvement adds to the optimistic outlook. This index tracks both the manufacturing and non-manufacturing sectors of the Chicago-area economy.

At 10:00 the final April U. of Michigan consumer sentiment index expected unchanged from the mid-month read at 98.0; as reported sentiment 97.0 but compared to the final in March a little better; March final 96.9.

Presently investors and traders are enamored with the Trump tax plan blueprint released Wednesday. As time moves forward, it should become apparent that those tax cuts will not likely be easy or quick to move through Congress. Technically our models and other price action indicators are mostly neutral; not bullish but not bearish either.

Source: TBWS

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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