Month-in-Review: April 2019

First-quarter GDP stunned even the most optimistic forecasters, rising 3.2%, a two-quarter high. The stronger-than-expected growth profile January to March furthermore not only indicated a solid domestic economy despite ongoing international cross-currents including trade, Brexit, and slower growth in major international economies, but a reduced probability for a near-term adjustment to monetary policy. Of course, with still “muted” price levels, some policy officials initiated the conversation of the cycle’s first rate cut and the conditions that would warrant more accommodative policy, including sustained low inflation. Meanwhile, the White House continued to amp up pressure on the Federal Reserve to do “its job properly” to support growth and a further expansion in the equity market by the "lowering of rates, like one point, and some quantitative easing.”

Market Activity and Commodities

·      Equities – Equities continued a solid performance through April, after posting the strongest first quarter in years. Beginning at 2,834.40, the S&P 500 rose 3.9% in April to close at an all-time high of 2,945.83. The Dow, meanwhile, rose 2.6% in April from 25,928.68 to 26,592.91. Since the start of 2017, U.S. equities rose an average 35%.

·      Treasuries – Treasury yields moved higher at the start of the second quarter. The 10-yr Treasury yield rose 9bps, rising from 2.41% to 2.50% in April. The 2-yr Treasury yield rose 1bp by the end of April, closing at 2.27%. Since the start of the year, the 2-yr fell 22bps and the 10-year dropped 19bps.

·      Oil      

o  (Apr 8) – Oil prices pushed higher amid rising tensions in Libya, ongoing production cuts from OPEC and U.S. sanctions against Iran and Venezuela. Crude traded up 0.44% at $63.36 a barrel.

o  (Apr 22) – The U.S. ended waivers on sanctions for countries buying oil from Iran. Some analysts, however, do not expect a sustained increase in oil costs, arguing an increased global supply will thwart rising energy prices. Meanwhile, others predict prices will reach $75-$85 mid-year, pushing near the highs of 2018 (a peak of $76.41 was reached in October 2018). Crude traded down 0.08% at $65.65 a barrel.

o  (Apr 24) – Oil prices backed off a six-month high of $66.55 a barrel as the American Petroleum Institute (API) indicated the market was less tight than feared. According to the API, inventories rose by 6.86 million barrels last week. Oil traded up 0.09% at $66.36 a barrel.

National Growth and Outlook

·      NFIB Small Business Optimism (Apr 9) – The NFIB Small Business Optimism Index rose from 101.7 to a reading of 101.8 in March, less than the expected rise to 102.0, according to Bloomberg, albeit a three-month high.

·      Leading Index (Apr 18) – The Leading Index rose 0.4% in March, as expected, according to Bloomberg, and a six-month high.

·      Chicago Fed National Activity Index (Apr 22) – The Chicago Fed National Activity Index rose from -0.31 to a reading of -0.15 in March, the third consecutive month of a below-zero reading. According to Bloomberg, the index was expected to improve to a reading of -0.10 at the end of the first quarter. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In March, 37 of the 85 monthly individual indicators made positive contributions, while 47 made negative contributions.

·      GDP (Apr 26) – Q1 GDP was reported at 3.2%, surpassing the 2.3% gain forecasted, according to Bloomberg, and a two-quarter high. Year-over-year, the U.S. economy continued to expand, accelerating to a 3.2% pace in Q1. In the details, personal consumption rose 1.2% in the first quarter, following a 2.5% gain in the fourth quarter, and marking a four-quarter low. Goods consumption, furthermore, declined outright, down 0.7% in Q1, thanks to a 5.3% drop in durable goods consumption, the most since Q4 2009. Nondurable sales, on the other hand, rose 1.7% in the first quarter, following a 2.1% rise in Q4. Services consumption increased 2.0% in Q1, a four-quarter low. Gross private investment gained 5.1% January to March, following a 3.7% rise the quarter prior, thanks to a $128.4 billion rise in inventories in Q1, contributing 0.65% to the headline. Fixed investment rose 1.5% in the first quarter, a two-quarter low. Nonresidential investment, including office buildings and factories, increased 2.7%, half the rise reported the quarter prior, due to an 8.6% increase in intellectual property investment and a 0.2% gain in equipment investment. Structures investment, however, fell 0.8% in Q1, the third consecutive quarter of decline. Additionally, residential investment also declined outright, falling 2.8% in the first quarter, the fifth consecutive quarter of decline. On the trade side, exports unexpectedly rose 3.7%, a three-quarter high, while imports declined 3.7% in Q1, the most since Q4 2012. Finally, government consumption rose 2.4% in the first quarter, a two-quarter high. Federal spending was flat in Q1; state and local spending rose 3.9%, the most since Q1 2016. Excluding trade, inventories and government, real private domestic sales grew just 1.3% in the first quarter, the weakest in nearly six years.

Employment

·      Jobless Claims

o  (Apr 4) – Initial jobless claims fell 10k from 212k to 202k in the week ending March 30. The four-week average fell from 218k to 214k.

o  (Apr 11) – Initial jobless claims fell 8k from 204k to 196k in the week ending April 6. The four-week average fell from 214k to 207k.

o  (Apr 18) – Initial jobless claims fell 5k from 197k to 192k in the week ending April 13. The four-week average fell from 207k to 201k.

o  (Apr 25) – Initial jobless claims rose 37k from 193k to 230k in the week ending April 20, the largest rise in 19 months. The four-week average increased from 202k to 206k.

·      Nonfarm Payrolls (Apr 5) – Nonfarm payrolls rose 196k in March, surpassing the 177k gain expected, according to Bloomberg, and a two-month high. February payrolls were revised up from 20k to 33k, and January payrolls were revised higher from 311k to 312k. Thus, the overall change in nonfarm payrolls (March data + net revisions) was 210k. The three-month average, however, declined from 191k to 180k at the end of the first quarter. In the details, private payrolls increased 182k in March, following a 28k gain in February. Goods-producing payrolls rose 12k, a two-month high, due to a 16k increase in construction payrolls. Manufacturing payrolls, however, fell 6k in March, the first monthly decline since July 2017. Service producing payrolls increased by 170k in March, following a 56k rise in February. Trade and transport payrolls, however, declined 5k in March, with retail payrolls dropping 12k, the second consecutive month of decline. Education and health payrolls gained 70k, a two-month high, and business services payrolls rose 37k at the end of the first quarter despite a 5k reduction in temporary hires. Additionally, financial payrolls rose 11k in March, a five-month high, leisure and hospitality payrolls increased 33k and information payrolls gained 10k in March, following four consecutive months of decline. Government payrolls rose 14k at the end of Q1; the gain was at the state and local level with federal employment dropping 2k, a three-month low.

·      Participation Rate (Apr 5) – The civilian labor force decreased by 224k in March, the third consecutive month of decline. As a result, the participation rate fell from 63.2% to 63.0% in March, a four-month low.

·      Unemployment Rate (Apr 5) – Household employment fell by 201k in March, following a 255k rise the month prior. Coupled with a decline in the labor force , the unemployment rate remained at 3.8% in March for the second consecutive month, near a five-decade low.

·      Average Hourly Earnings (Apr 5) – Average hourly earnings rose 0.1% in March, less than the 0.3% rise expected, according to Bloomberg, and following a 0.4% gain in February. Year-over-year, wages rose 3.2% in March, down from a 3.4% pace reported the month prior, and a two-month low.

·      Average Weekly Hours (Apr 5) – The average workweek rose from 34.4 to 34.5 hours at the end of the first quarter, a two-month high.

·      JOLTS (Apr 10) – The number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – declined 538k from 7.625m to 7.087m in February, a one-year low.

Consumer Activity and Confidence

·      Vehicle Sales (Apr 2) – Total vehicle sales rose 5.7% in March from 16.56m to a 17.50m unit pace, a three-month high. Year-over-year, vehicle sales rose 1.4% at the end of the first quarter, the most since August 2018, and following two consecutive months of decline.

·      Consumer Credit (Apr 5) – Consumer credit rose $15.19 billion in February, less than the $17.00 billion median estimate, according to Bloomberg, and a two-month low. Monthly gains in consumer credit averaged $15.57 billion in 2018.

·      University of Michigan Consumer Sentiment

o  (Apr 12) – The University of Michigan Consumer Sentiment Index declined from 98.4 to a reading of 96.9 in April, more than the expected decline to a reading of 98.2, according to Bloomberg, albeit a two-month low. In the details, consumers’ assessment of current conditions increased from 113.3 to 114.2 in the preliminary April report, a four-month high, while consumer expectations fell from 88.8 to a reading of 85.8, a two-month low.

o  (Apr 26) – The University of Michigan Consumer Sentiment Index rose from a preliminary reading of 96.9 to 97.2 in the final April report, more than the expected rise to 97.0, according to Bloomberg, albeit still a two-month low. In the details, consumer expectations rose from a preliminary reading of 85.8 to 87.4, while consumers’ assessment of current conditions fell from a preliminary reading of 114.2 to 112.3 in the final April report, a three-month low.

·      Retail Sales (Apr 18) – Retail sales rose 1.6% in March, more than the 1.0% rise expected, according to Bloomberg, and the largest monthly increase since September 2017. Year-over-year, retail sales increased 3.6% in March following a 2.2% annual rise the month prior. Car sales rose 3.1% in at the end of Q1 following two consecutive months of decline, and gasoline stations sales rose 3.5%, matching the rise the month prior. Excluding autos, retail sales rose 1.2% in March and increased 3.6% over the past 12 months. Excluding autos and gasoline, retail sales increased 0.9% at the end of the first quarter, a two-month high, and rose 3.6% year-over-year. In the details, furniture sales rose 1.7%, electronics sales increased 0.5% and building materials sales gained 0.3% in March, following a 4.4% decline the month prior. Additionally, health and personal care sales gained 0.2%, food and beverage sales rose 1.0%, and clothing sales increased 2.0% in March, following three consecutive months of decline. On the weaker side, sporting goods sales fell 0.3%, offsetting the 0.3% gain the month prior.

·      Consumer Confidence (Apr 30) – The Consumer Confidence Index rose from 124.2 to a reading of 129.2 in April, surpassing the rise to 126.8 expected, according to Bloomberg, and a two-month high. In the details, present situation increased from 163.0 to 168.3, and consumer expectations rose from 98.3 to 103.0 at the beginning of the second quarter, a two-month high.

Inflation

·      CPI (Apr 10) – The CPI rose 0.4% in March, as expected, according to Bloomberg, and a fourteen-month high. Year-over-year, headline consumer prices rose 1.9% in March, up from the 1.5% pace reported in February, and a three-month high. Energy costs rose 3.5% in March, following a 0.4% gain the month prior. Food prices increased 0.3% in March, following a 0.4% gain the month prior. Excluding food and energy, the core CPI rose 0.1% at the end of the first quarter, a tenth of a percentage point less than expected, according to Bloomberg, and following a similar gain the month prior. Over the past 12 months, the core increased 2.0%, a thirteen-month low. In the details, services costs rose 0.3% in March, following a 0.1% rise in February. Housing prices increased 0.3% at the end of the first quarter, thanks to a 0.3% rise in the OER. Additionally, education and communication costs rose 0.1%, thanks to a 0.5% rise in personal computer costs, commodities prices gained 0.7% and transportation prices increased 1.5% at the end of March following a 0.1% rise the month prior. Additionally, medical care prices jumped 0.3% in March, a three-month high. On the weaker side, apparel prices dropped 1.9% at the end of the first quarter, the most since April 1949.

·      PPI (Apr 11) – The PPI rose 0.6% in March, double the rise expected, according to Bloomberg, and a five-month high. Year-over-year, headline producer prices rose 2.2% at the end of the first quarter, up from 1.9% reported in February and a three-month high. In the details, food prices rose 0.3% in March, offsetting the 0.3% decline the month prior, and energy prices increased 5.6%, following a 1.8% gain in February. Year-over-year, energy prices declined 0.4% at the end of Q1, the fourth consecutive month of annual price decline. Excluding food and energy costs, the core PPI rose 0.3% in March and increased 2.4% over the past 12 months, as expected, according to Bloomberg, albeit a ten-month low. Additionally, services costs rose 0.3%, due to a 1.1% increase in trade costs, a five-month high. Other costs were flat, while transportation and warehousing costs fell 0.8% in March, the second consecutive month of decline.

·      PCE (Apr 29) – The PCE rose 0.2% in Mach, a tenth of a percentage point less than expected, according to Bloomberg, and following a 0.1% increase the month prior. Year-over-year, headline inflation increased 1.5% at the end of the first quarter, just shy of the 1.6% gain expected, albeit a three-month high. Excluding food and energy, the core PCE was flat in March and increased 1.6% year-over-year, the weakest pace since January 2018.

Manufacturing and Production Activity

·      ISM Manufacturing (Apr 1) – The ISM Manufacturing Index rose from 54.2 to a reading of 55.3 in March, more than the expected increase to 54.5, according to Bloomberg, and a two-month high. In the details, prices paid rose from 49.4 to 54.3, production increased 1 point to 55.8, and new orders gained from 55.5 to 57.4, a two-month high. On the weaker side, backlog of orders fell from 52.3 to 50.4 at the end of the first quarter, a two-month low, and inventories declined from 53.4 to 51.8. Additionally, imports slipped from 55.3 to 51.1, and exports decreased from 52.8 to 51.7 in March, the lowest reading since October 2016.

·      ISM Non-Manufacturing (Apr 3) – The ISM Non-Manufacturing Index fell from 59.7 to a reading of 56.1 in March, more than the expected decline to 58.0, according to Bloomberg, and the lowest reading since August 2017. In the details, backlog of orders gained from 55.5 to 56.5 in March, a six-month high, employment rose from 55.2 to 55.9, and imports increased from 48.5 to 51.5, a two-month high. On the weaker side, business activity fell from 64.7 to 57.4, new orders decreased from 65.2 to 59.0, and supplier deliveries declined from 53.5 to 52.0, a two-month low.

·      Factory Orders (Apr 8) – Factory orders fell 0.5% in February, as expected, according to Bloomberg, and following a flat reading at the start of the year. Year-over-year factory orders are up 1.5%, the slowest pace since November 2016.

·      Empire Manufacturing (Apr 15) – The Empire Manufacturing Index rose from 3.7 to a reading of 10.1 in April, more than the expected rise to a reading of 8.0, according to Bloomberg, and a four-month high. In the details, new orders rose from 3.0 to 7.5, shipments increased from 7.7 to 8.6, and work hours rose from -3.4 to +4.3 in April, a three-month high. On the weaker side, prices paid fell from 34.1 to 27.3 and employment declined from 13.8 to 11.9 at the start of the second quarter, a two-month low.

·      Industrial Production (Apr 16) – Industrial production unexpectedly fell 0.1% in March, a two-month low. According to Bloomberg, industrial production was expected to rise 0.2% at the end of the first quarter.

·      Capacity Utilization (Apr 16) – Capacity utilization unexpectedly declined from 79.0% to 78.8% in March, an eight-month low. According to Bloomberg, capacity utilization was expected to increase to 79.2% at the end of the first quarter.

·      Philly Fed Business Outlook Survey (Apr 18) – The Philly Fed Index declined from 13.7 to a reading of 8.5, more than the expected decline to 11.0, according to Bloomberg, and a two-month low. In the details, new orders popped from 1.9 to 15.7, the highest reading since January, prices paid rose from 19.7 to 21.6, and employment gained from 9.6 to 14.7, a four-month high. On the weaker side, shipments declined from 20.0 to 18.4 in April, a two-month low.

·      Richmond Fed Manufacturing (Apr 23) – The Richmond Fed Index unexpectedly dropped from 10 to a reading of 3 at the beginning of the second quarter, a three-month low. According to Bloomberg, the index was expected to remain at a reading of 10 in April for the second consecutive month.

·      Durable Goods (Apr 25) – Durable goods orders rose 2.7% in March, surpassing the 0.8% gain expected, according to Bloomberg, and reaching a seven-month high. Year-over-year, headline orders rose 0.8% at the end of the first quarter, the weakest pace since April 2017. Transportation orders gained 7.0%, following a 2.9% decline the month prior, thanks to a 31.2% increase in civilian aircraft orders, a three-month high. Also, vehicles and parts orders rose 2.1% in March. Excluding transportation, durable goods orders rose 0.4% at the end of the first quarter and rose 1.0% over the past 12 months. In other details, machinery orders increased 0.3%, electrical equipment orders gained 0.1% and computers and electronics orders popped 2.2% in March, a five-month high. On the weaker side, fabricated metals orders fell 0.3% in March, the third consecutive month of decline, and primary metals orders dropped 0.2%, following a 0.7% gain the month prior.

·      Capital Goods (Apr 25) – Capital goods orders rose 6.6% in March, following a 3.9% decline the month prior. Nondefense capital goods orders increased 6.5% at the end of the first quarter. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 1.3% in March following a 0.1% rise the month prior. Year-over-year, business investment rose 5.3% at the end of the first quarter, compared to a 2.8% annual pace reported in February, but down from a recent peak of 13.3% in September 2017.

·      Kansas City Fed Manufacturing (Apr 25) – The Kansas City Fed Index fell 5 points to a reading of 5 in April, a two-month low. According to Bloomberg, the index was anticipated to decline to a reading of 8 at the start of the second quarter. The KC index has maintained a positive reading for twenty-nine consecutive months, nearly matching the streak in 2010-2012 (thirty-three months).

·      Dallas Fed Manufacturing (Apr 29) – The Dallas Fed Manufacturing Outlook Index unexpectedly declined from 6.9 to a reading of 2.0 in April, a three-month low. According to Bloomberg, the index was expected to rise to a reading of 10.0 at the start of the first quarter.

·      Chicago PMI (Apr 30) – The Chicago PMI dropped from 58.7 to a reading of 52.6 in April, more than the expected decline to 58.5, according to Bloomberg, and the lowest reading since January 2017. In the details, two of the five components – order backlogs and prices paid – gained momentum at the beginning of the second quarter.

Housing Market Activity

·      Construction Spending (Apr 1) – Construction spending unexpectedly rose 1.0% in February, following a 2.5% gain at the start of the year. According to Bloomberg, construction spending was expected to decline 0.2% in the second month of the year. Construction spending has averaged 0.1% over the last six months and rose 1.1% year-over-year, following a 2.4% annual gain the month prior.

·      NAHB Housing Market Index (Apr 16) – The NAHB Housing Market Index rose 1 point to a reading of 63, as expected, according to Bloomberg, and a six-month high.

·      Building Permits (Apr 19) – Building permits unexpectedly fell 1.7% in March from 1,291k to a 1,269k unit pace, a five-month low. According to Bloomberg, permits were expected to rise 0.7% at the end of the first quarter. Year-over-year, building permits fell 6.5% in March, the third consecutive month of decline. Single family permits declined 1.1% in March, and fell 4.1% year-over-year, the sixth consecutive month of decline. Multi-family permits dropped 2.7% at the end of the first quarter, and fell 10.3% year-over-year, a five-month low.

·      Housing Starts (Apr 19) – Housing starts unexpectedly fell 0.3% in March, pulling the annual pace down from 1,142k to 1,139k, the weakest pace since May 2017. According to Bloomberg, starts were expected to gain 5.4% at the end of the first quarter. Multi-family starts were flat, while single family starts fell 0.4% in March, the second consecutive month of decline. Year-over-year, housing starts dropped 14.2% at the end of the first quarter, the sixth consecutive month of negative activity, thanks to an 11.0% fallout in single family starts and a 20.4% decline in multi-family starts from this time last year. On a regional basis, starts declined in three out of the four regions of the country at the end of the first quarter: starts fell 4.4% in the Northeast, declined 7.2% in the South and dropped 17.6% in the Midwest. Starts rose, however, 31.4% in the West, following an 18.0% decline the month prior.

·      Existing Home Sales (Apr 22) – Existing home sales declined 4.9% from 5.48m to a 5.21m unit pace in March, more than the 3.8% decline expected, according to Bloomberg, and a two-month low. Single family sales fell 4.9% and multi-family sales declined 5.3%. Year-over-year, existing home sales declined 5.4%, the thirteenth consecutive month of negative sales growth, with single family sales falling 4.7%, and multi-family sales dropping 11.5%. From a price standpoint, the median cost of a previously owned home rose 3.8% in March from a year earlier to $259k.

·      New Home Sales (Apr 23) – New home sales unexpectedly rose 4.5% from 662k to a 692k unit pace in March, a sixteen-month high. According to Bloomberg, new home sales were expected to decline 2.7% at the end of the first quarter. Year-over-year, sales rose 3.0% in March following six consecutive months of annual decline. With a rise in the pace of sales, the months’ supply of new homes fell from 6.3 to 6.0 months, a nine-month low. From a price standpoint, the median cost of a newly constructed home declined 4.0% from the month prior to $303k. Year-over-year, new home prices fell 9.7% in March.

·      S&P/CS 20 City Index (Apr 30) – The S&P Case-Shiller 20 City Home Price Index rose 0.2% in February, as expected, according to Bloomberg, and a three-month high. Year-over-year, house prices cooled from 3.5% to 3.0%, the slowest pace since September 2012.

·      Pending Home Sales (Apr 30) – Pending home sales rose 3.8% in March, more than the 1.5% rise expected, according to Bloomberg, and a two-month high. Year-over-year, however, pending home sales fell 3.2%, the eleventh consecutive month of decline.

Trade and Currency

·      U.S. Dollar

o  (Apr 1) – The dollar fell following remarks from President Trump threatening to close the U.S. border with Mexico. The dollar traded down 0.23% at $97.07.

·      British Pound

o  (Apr 2) – The pound came under pressure after U.K. lawmakers failed to reach a majority vote on four new Brexit alternatives. The pound traded down 0.62% at $1.30 against the U.S. dollar.

·      Trade (Apr 17) – The trade balance unexpectedly narrowed 3.4% from $51.1 billion to $49.4 billion in February, an eight-month low. According to Bloomberg, the trade balance was expected to widen to $53.4 billion.

·      Import Prices (Apr 12) – Import prices rose 0.6% in March, more than the 0.4% rise expected, according to Bloomberg, and following a 1.0% gain in February. Year-over-year, import prices were flat at the end of the first quarter, following three consecutive months of decline. Trade prices fell an average of 0.1% per month throughout 2018.

Monetary Policy, Reports, and Commentary

·      Atlanta Fed GDPNow Forecast

o  (Apr 29) – Following a muted reading on the core PCE posting its smallest annual gain in fourteen months, the Atlanta Fed’s Q2 GDP initial forecast came in at 1.3%, down from the 3.2% reported in Q1.

·      Fed Speak

o  (Apr 16) – According to Boston Fed President Eric Rosengren, the Fed should increase its ability to fight economic downturns by committing to let inflation run above 2% "in good times.” Speaking at Davidson College in North Carolina, Rosengren said, “My own preference would be an inflation range of 1.5%-2.5%" because hitting the current target will only get harder with rates as low as they are. “Even though we're only missing by a little bit it actually does matter if you miss by a little bit on a regular basis."

o  (Apr 22) – According to Chicago Fed President Charles Evans, the Federal Reserve may need to cut interest rates if U.S. inflation falls. “If core inflation were to move down to, let’s just say, 1.5 percent," that would indicate that monetary policy “is actually restrictive in holding back inflation, and so that would naturally call for a lower funds rate," Evans told reporters after a speech in New York. Of course, that’s not the Chicago Fed president’s forecast; Evans sees rates on hold until the fall of 2020, “...but hypothetically speaking, that would be an argument.”

·      March 20th FOMC Meeting Minutes (Apr 9) – According to the Fed’s March 20th FOMC meeting minutes, Federal Reserve officials struggled with “significant uncertainties” including Brexit, weaker-than-expected activity in Europe and China, as well as ongoing weakness in the U.S. Noting persistently low inflation in the domestic economy as well as a fourth-quarter slowdown that seemed to be extending into the first quarter of the new year, most Fed members were comfortable maintaining their “patient” stance established in January and eliminating expectations for further policy action in 2019. Although, some members saw higher rates as potentially “appropriate” later this year if economic growth continued “above its longer-run trend rate.” “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.” Despite ongoing risks and expected stability in policy, the Committee, furthermore, remained broadly upbeat regarding the current state of the economy, reiterating Chairman Powell’s earlier comments that the domestic economy was “in a good place.” “Participants generally expected economic activity to continue to expand, labor markets to remain strong and inflation to remain near 2 percent.” Aside from rate policy, at the March meeting the Fed announced plans to right-size the balance sheet by September. According to the March FOMC meeting minutes, officials continued the discussion to include maintaining a “minimum operating level” of bank reserves. Tapering the taper beginning in May, the Fed is expected to end Quantitative Tightening (QT) with nearly $1 trillion in excess reserves and a total balance sheet of $3.5 trillion, well above the pre-recessionary level of $890 billion.

Domestic News and Activity 

·      Politics and the Trump Administration

o  (Apr 1) – According to reports, the U.S. is cutting off aid to El Salvador, Guatemala and Honduras, known collectively as the "Northern Triangle.” The decision came as President Trump identified a growing number of migrants flowing into the U.S. from these Central American countries. According to the House Appropriations Committee, around $700M of aid will be affected.

o  (Apr 1) – President Trump threatened to close the U.S. border with Mexico, a decision that could help to address the migrant crisis at the border, while at the same time potentially disrupt billions of dollars in trade.

o  (Apr 2) – Voters will have to wait until after the 2020 election for a replacement for Obamacare. President Trump tweeted a "vote will be taken right after the Election when Republicans hold the Senate & win back the House." The comment came as the administration recently changed its position in a lawsuit arguing that the Affordable Care Act should be struck down entirely.

o  (Apr 3) – U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin resumed trade talks with Chinese Vice Premier Liu He. According to reports, American and Chinese officials have negotiated nearly 90% of the deal, but there remains questions of implementation and enforcement.

o  (Apr 3) – According to Larry Kudlow, Director of the National Economic Council, the White House is reportedly looking for ways to limit the economic damage that would expectedly result if President Trump closes the U.S.-Mexico border. "Particularly if you can keep those freight lanes, truck lanes, open, that's probably the nub of it," he said. "There are ways you can do that which would ameliorate the breakdown in supply chains." According to Bloomberg, U.S. trade with Mexico exceeds $1.7B daily, and nearly half a million people legally cross the southern border every day as workers, students, shoppers, and tourists.

o  (Apr 4) – President Trump met with Chinese Vice Premier Liu He, reinforcing expectations the two sides will come to an agreement. An agreement in and of itself, however, does not necessarily imply a reversal of the U.S. tariffs already in place. According to reports, the White House plans to keep at least some of the already implemented levies on Chinese goods in place to ensure that China “keeps up its side of any potential trade agreement.”

o  (Apr 5) – President Trump confirmed that Herman Cain was being vetted for a seat on the Federal Reserve Board. Since Trump took office, he has appointed four members to the Board of Governors, including Chairman Powell and Vice Chairman Richard Clarida. There remains, however, two vacancies among the seven seats. Herman Cain was a candidate for the 2012 U.S. Republican Party presidential nomination. Prior to running for office, Cain ran the Nebraska-based Godfather’s Pizza franchise from 1986 to 1996 and has claimed his leadership saved the company from bankruptcy. Cain joined the Federal Reserve Bank of Kansas City in 1989, later becoming its deputy chairman and then chairman. Cain is known as an American politician and author, business executive, radio host, syndicated columnist, and Tea Party activist.

o  (Apr 8) – According to a White House statement, “The United States and China had productive meetings and made progress on numerous key issues" during trade talks from April 3-5. “Significant work remains, and the principals, deputy ministers, and delegation members will be in continuous contact to resolve outstanding issues." Chinese reports also claimed progress; Chinese state media reported that the two sides had made "new progress" in the talks and future discussions will be conducted in "various ways." Still, “progress” has been slow to materialize after months of talks between the U.S. and China. Bypassing the originally scheduled March 1 date, many analysts are increasingly skeptical that a deal – if reached – will have little meat to it.

o  (Apr 10) – President Trump issued an executive order aimed at preventing states from blocking pipelines and other energy infrastructure using power afforded under the Clean Water Act. The latest move is seen as a pushback against local representatives opposed to fossil fuel developments in their states. Whether in agreement or not, the latest move is expected to be challenged in court.

o  (Apr 10) – The White House continued to amp up pressure on the Federal Reserve. President Trump tweeted that the Federal Reserve should have done “its job properly” to support growth and a further expansion in the equity market by the "lowering of rates, like one point, and some quantitative easing.”

o  (Apr 11) – In its World Economic Outlook, the IMF downgraded its 2019 global economic forecast from 3.5% to 3.3%, warning of a “slowing world economy” and urging leaders to take caution in what it called a "delicate moment."

o  (Apr 12) – Herman Cain’s nomination to the Fed board faced stark opposition. According to Bloomberg and the WSJ, a number of Republican senators said they may not be willing to vote for him because of sexual harassment allegations that emerged earlier during his 2012 presidential campaign.

o  (Apr 15) – According to U.S. Treasury Secretary Steven Mnuchin, a U.S.-China trade agreement would go "way beyond" previous efforts to open China’s markets to American companies and the two sides were "getting close to the final round of concluding issues." Speaking at the International Monetary Fund and World Bank spring meetings, Mnuchin went on to say, “This is way beyond anything that looked like a bilateral investment treaty.” 

o  (Apr 15) – President Trump again took aim at the Federal Reserve: "If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%...with almost no inflation." "Quantitative tightening was a killer, should have done the exact opposite!"

o  (Apr 15) – The IMF's steering committee released a communique suggesting that "growth is projected to firm up in 2020, but risks remain tilted to the downside." "These include trade tensions, policy uncertainty, geopolitical risks, and a sudden sharp tightening of financial conditions. To protect the expansion, we will continue to mitigate risks, enhance resilience, and, if necessary, act promptly to shore up growth for the benefit of all."

o  (Apr 17) – A former governor of Massachusetts became the first Republican to challenge Donald Trump for the party's 2020 presidential nomination. Bill Weld, 73, announced his candidacy accusing the president of leaving the country in "grave peril,” and suggesting his priorities have been skewed away from the “good of the country." While the first Republican challenger, the other side of the field has become quite crowded with twenty-one presidential hopefuls in full campaign mode.

International News and Activity 

·      European Union

o  (Apr 1) – The Eurozone’s PMI Manufacturing Index fell from 47.6 to 47.5 in March. Germany’s PMI fell to a seven-year low at a reading of 44.1 at the end of the first quarter.

o  (Apr 10) – The ECB opted to keep rates unchanged in its April policy announcement; the main refinancing rate was held at 0.0%, the marginal lending facility rate at 0.25% and the deposit facility rate at -0.40%. The European Central Bank furthermore reiterated intentions to keep rates steady at least through 2019 or for as long as needed, and to continue its asset purchase program for an extended period. Rates will remain at their present levels “at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.” “The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase program for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.”

o  (Apr 10) – Italy's populist government conceded it will not be able to hit the budget-deficit target agreed on with EU authorities. According to reports, the finance ministry announced the country’s 2019 deficit will be 2.4% of GDP, rather than 2% as agreed upon in December after “tense negotiations.” Some worry a standoff with Brussels could prompt a rise in borrowing costs for Italian banks.

o  (Apr 11) – EU leaders and the U.K. government agreed to a “flexible extension” of the Brexit deadline until October 31. This is the second extension from the original March 29 deadline. According to reports, many EU leaders had wanted a much longer extension possibly until March 2020. French President Emmanuel Macron, however, was said to have blocked such a long delay. According to the document, from now until October 31, the U.K. also has “the possibility to revoke article 50 and cancel Brexit altogether” or leave the bloc earlier if members of its parliament reach a consensus. If British lawmakers don’t ratify a deal by May 22, however, the U.K. must participate in European Parliament elections scheduled for May 23-26.

o  (Apr 15) – ECB President Mario Draghi took the rare step of voicing concern over the independence of the Fed in the face of the constant criticism from the White House. Speaking at the spring meetings of the International Monetary Fund and World Bank, Draghi said, “I’m certainly worried about central bank independence in other countries, especially…in the most important jurisdiction in the world.”

o  (Apr 16) – According to reports, European negotiators initiated trade talks with the U.S. after each side threatened the other with billions of dollars in new tariffs. The EU is reportedly willing to agree to its own limited deal with President Trump in good part to avoid levies on foreign automobiles and car parts.

o  (Apr 18) – The latest German manufacturing PMI reported a contraction for the fourth consecutive month. According to the April report, activity in the German manufacturing sector inched up from 44.1 to 44.5 at the start of Q2, still, however, the fourth consecutive reading below 50. Separately, activity in Germany's services sector rose to a seven-month high in April. The reading came after Germany lowered its 2019 growth forecast from 1.0% to 0.5%, the second reduction in the country’s outlook in just three months.

·      The U.K.

o  (Apr 1) – U.K. lawmakers failed to reach a majority on four new Brexit alternatives. As a result, British Prime Minister Theresa May scheduled “crisis talks” with her cabinet.

o  (Apr 3) – Theresa May held a seven-hour cabinet meeting announcing a desire to reach across the aisle and talk with Labour leader Jeremy Corbyn about a softer Brexit deal which, according to reports, could mean British membership in a customs union with the EU.

o  (Apr 5) – After multiple votes, there was not a breakthrough in the Brexit “logjam.” According to reports, British Prime Minister Theresa May formally requested a second-round extension to June 30th from the original March 29th deadline as the first extension to April 12th appeared to be an insufficient amount of time for London to find a solution. While some were in favor of offering additional time, other EU governments were opposed to such a long timetable for divorce.

o  (Apr 8) – According to British Prime Minister Theresa May, “The choice that lies ahead of us is either leaving the European Union with a deal, or not leaving at all.”

o  (Apr 8) – The U.K. government is prepared to take a hard line when it comes to online safety, appointing what it claims to be the world's first independent internet safety regulator. Companies – including Facebook, YouTube, Twitter as well as online forums, meaning services and search engines – that fail to meet the new standard will reportedly face huge fines. Big Tech lobbyists, meanwhile, suggest the proposed laws are too vague, causing confusion for enforcement and may harm competition in the sector.

o  (Apr 12) – According to British Prime Minister Theresa May, “There is actually more agreement in relation to a customs union than it is often given credit for when different language is used.” According to reports, such a comment suggests the British leader may be less opposed to staying in a post-Brexit customs union with the EU than it might appear. Opposition leaders, meanwhile, suggested the need for add-ons with any agreement that would give the U.K. some kind of say in trade policy.

o  (Apr 15) – According to Chancellor of the Exchequer Phillip Hammond, the idea of a second Brexit referendum is "very likely" to be put before Britain’s parliament again although the government remains “opposed to any new plebiscite.” While the government is opposed to a new public vote, Theresa May failed to get her own Conservative Party to back her Brexit divorce deal and has reportedly reached out to the opposition.

·      China

o  (Apr 1) – China’s private Caixin/Markit Manufacturing PMI came in stronger than expected at 50.8 for March, while the official PMI rose to 50.5 from 49.2, returning back above a reading of 50 which separates growth from contraction.

o  (Apr 9) – China's state planner labeled Bitcoin mining as an "undesirable" industry, recommending local governments eliminate the sector in the country. The public has until May 7 to share feedback on proposed amendments, after which the final version will be published and become effective.

o  (Apr 12) – According to the latest customs department data, China's total trade with the U.S slumped by 11% in the first three months of this year. The dip is primarily the result of a decline in U.S. exports overseas. U.S. exports to China fell 28% in Q1 in yuan-denominated terms. Exports to the U.S., meanwhile, fell 3.7% over the same three months. In March alone, U.S. exports to China fell 21%, while Chinese exports to the U.S. rose 10.6%.

o  (Apr 17) – Chinese GDP rose 6.4% in the first three months of the year, dampening fears of a more pronounced slowdown in the world’s second-largest economy as a result of tenuous trade relations with the U.S. At the same time, according to Bloomberg, China produced a record 231M tons of steel in Q1, thanks to a sizable increase in infrastructure consumption fueled by a fresh round of government stimulus. First-quarter steel production is up almost 10% from a year earlier, with production in March alone rising 10% to 80.3M tons.

o  (Apr 30) – The Chinese PMI fell to 50.2 in April, lower than the 50.8 reading expected. After three months of sub-50 readings, in March the PMI pushed back above the breakeven level (50) to signal expansion.

·      Japan

o  (Apr 25) – The Bank of Japan left policy unchanged, at its latest April 25th meeting, maintaining its overnight interest rate at -0.1% and its target on 10-year bond yields at around zero. Additionally, the BOJ pledged to keep rates extremely low until at least spring 2020, adding calendar-specific guidance that had previously been supported by an ambiguous commitment for an "extended period." According to updated projections, the BOJ sees domestic growth rising to 1.3% by 2022 from the current 0.8% and inflation rising to 1.6% by 2021 from 0.4% as of March.

-Lindsey Piegza, Ph.D., Chief Economist