Better-than-Expected Economic Data Dampen Recession Concerns in the Near Term
The week’s economic news was mixed, but bond yields still rose. The ten-year Treasury yield rose ten basis points to 2.75 percent, its highest level since late January. The slope of the 2-10-year yield curve widened to 20 basis points, its highest level of the year.
Most of the move in yields followed the release of the fourth quarter GDP report, which was stronger than expected. The economy grew at an estimated annual rate of 2.6 percent in the quarter, better than the 2.2 percent consensus forecast, bringing growth for all of 2018 to 2.9 percent. The recent abundance of soft economic data had led some investors to fear the worst, but surprising strength in business investment and personal consumption allowed the quarter to exceed expectations.
The fourth quarter report is not enough, by itself, to dispel concerns about an economic slowdown. The Atlanta Fed GDPNow function estimates growth in this year’s first quarter of just 0.3 percent. That is well below the just under 2.0 percent Blue Chip consensus forecast, and the 2.0 percent forecast in the Wall Street Journal’s February Economic Forecasting Survey. The recent data leaves no doubt that the economy entered the year in something a slowdown, but the better-than-expected fourth quarter strength alleviated some of the fear that the odds of a recession had risen.
Some of the influences that contributed to the economic slowdown have receded as concerns. The Fed has stepped to the side, the federal government has reopened, and trade tensions with China have eased. The latest batch of economic data has by no means been robust, but there have been a few signs of improvement. Last week, consumer confidence rebounded sharply from January’s weakness, as did pending home sales. Manufacturing continued to slow, but did remain well in expansion territory, but weakness in the University of Michigan’s consumer sentiment survey did not confirm the rebound in the Conference Board’s confidence index. But overall, the evidence suggested a slower, but not worrisome level of activity.
There were also a couple of faint hints of improvement overseas last week, although not everywhere. In China, the flash manufacturing survey for February rose for the first time in three months, although it did remain at a contractionary level for the third straight month, but just barely at 49.9. In Germany, retail sales in January rebounded strongly from the sharpest monthly decline since 2010 in December. However, the news in Japan was less favorable, as industrial production fell for the third straight month in January, while retail sales and corporate profits also fell. And the February JP Morgan global manufacturing PMI released last week fell to its lowest level in 32 months. It did remain in expansion territory, but just barely at 50.6.
But overseas markets fared relatively well last week. Led by gains in Germany, stocks in the Eurozone rose 1.2 percent. In Japan, the Nikkei rose 0.8 percent, and in China the Shanghai Composite rose by 6.8 percent on signs of some progress on the trade front, including the U.S. stepping back from the threat of 25 percent tariffs. The index is now 20 percent higher for the year.
The economic calendar in the U.S. this week includes the February labor report. The Bloomberg consensus estimates the creation of 185,000 new non-farm jobs and a slight drop in the unemployment rate to 3.9 percent. Once again, average hourly earnings will be in focus, especially with Fed officials having recently discussed temporarily tolerating inflation above 2.0 percent in an effort to achieve its target as an average over time. Also on the calendar are January housing starts, which are expected to rebound from December’s plunge. In China, February trade data is scheduled, and in the Eurozone we’ll see January retail sales, as well as hear from the European Central Bank which meets on Thursday.
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