Kuwait: June 10, 2019
US GROWTH REVISED DOWN, WHILE FED REMAINS ‘PATIENT’
GDP growth in 1Q19 was revised down a touch to a still-strong annualized 3.1% from the previous estimate of 3.2%, on slightly softer private investment. Growth in Q1 was boosted by a likely temporary rise in inventories and is expected to slow to 2% or less in Q2. The labor market remains strong, with unemployment in April falling to its lowest since 1969 at 3.6% and earnings growth above 3% for the ninth consecutive month; this – together with a rebound in consumer confidence – has helped retail spending rebound from an earlier soft patch. The main near-term vulnerability is in the manufacturing sector: the ISM activity index hit a two-and-a-half-year low of 52.8 in April with the export orders component now in contraction territory amid slowing global demand and trade tensions. While manufacturing accounts for only 11% of GDP, it is an important lead indicator and the latest below-consensus data suggest that it may be slowing faster than expected.
Minutes from the Federal Reserve’s May policy meeting where it left interest rates unchanged at 2.25-2.50% saw further calls for ‘patience’ before making further moves. As well as the growth picture, inflation data could be increasingly pivotal for the rate outlook. The Fed’s preferred gauge of inflation – the core Personal Consumption Expenditure measure – remained low at 1.6% y/y in April and below the 2% target (though before any impact from recent tariff hikes); continued softness would challenge Fed Governor Jay Powell’s earlier contention that it was being kept low by transitory factors. Although financial markets have long priced-in one rate cut this year, low inflation and growth concerns have seen expectations of a second (and even third) cut gain traction. In a further dovish signal, the 10-year/3-month treasury yield gap again inverted – a technical measure often seen as a good predictor of a recession.
EUROPEAN ELECTIONS ERODE SUPPORT FOR CENTRIST POLICIES
News on the Eurozone economy has been relatively positive, continuing the broad recovery from last year’s slowdown. GDP in Germany – worth almost 30% of the region’s total – rebounded a solid 0.4% q/q in 1Q19, having narrowly avoided a recession in 2H18 and in line with the Eurozone average. However, the economy still faces near-term headwinds amid slowing global trade and calls for fiscal stimulus; reflecting the still uncertain outlook, yields on 10-year government bonds had plunged back firmly into negative territory at -0.2% at end-May – even below those in Japan. In France, where GDP grew 0.3% in 1Q19, unemployment fell to a 10-year low of 8.7% in Q1 despite popular unrest.
Elections to the European Parliament saw mainstream parties lose out to less traditional rivals in both the pro and anti-EU camps. The fracturing could make it more difficult to forge consensus on policy issues like the budget, regulation, the environment and immigration. It will also affect the scramble for nominations to the region’s top jobs, including for the head of the European Central Bank when current president Mario Draghi departs in October. Although Germany is advancing the case for its hawkish candidate, Jens Weidmann, it may yield to another country’s choice if it manages to secure one of the other top jobs. This could become pivotal given Weidmann’s criticism of the ECB’s ultra-loose monetary policy.
Political upheavals were perhaps greatest in the UK, where Prime Minister Theresa May was forced to resign over her handling of Brexit, and her Conservative Party was trounced in European elections by a combination of the newly-formed Brexit Party and on the other side by pro-Remain parties. May’s replacement as PM could be appointed in July and is likely to take a more pro-Brexit stance, including trying to renegotiate the withdrawal agreement with the EU before the end-October scheduled departure date. Risks of the UK leaving the EU without a deal have risen, but so have the prospects of a general election that could usher in a new left-wing government and perhaps a change of Brexit stance, including another referendum. Given the uncertainty, the pound could remain under pressure, having fallen around 3% versus both the US dollar and euro through May.