This Week’s Message: The Only Game In Town

This morning’s GDP number (+2.1%), while a marked decline from last quarter – and accompanied by a downward revision (to +2.9%) for 2018 – was as good as the market could ask for. 

While, under “normal” circumstances, considering the strong U.S. consumer depicted by the internals – and prices rising well above the consensus estimate (+2.4% vs +1.9% estimated for core)  the last thing the market would be counting on would be a Fed rate cut next Wednesday. But that’s what it’s going to get.

The guts of the GDP report are consistent with the signals from our own macro index; the consumer remains healthy, and confident (consumer spending +4.3%), while business investment is contracting.

While, again, this is not the sort of report that would remotely justify aggressive monetary stimulus, the drop in business spending and the backdrop of declining global trade has central bankers feeling uneasy, and, thus, in the mood to ease.

The fundamental problem, alas, with monetary easing at this juncture is that the consumer’s already spending to the hilt – i.e., it’s not like we need to boost aggregate demand – and the lack of business investment has nothing to do with the lack of access to capital (i.e., cutting interest rates right here will do virtually nothing to inspire businesses to expand). The lack of investment, frankly, has everything to do with the palpable uncertainty over global trade, that, in certain pockets (Asean nations are on the verge of signing a massive multi-lateral deal) is letting up, in others (the U.S. vs the world) it isn’t.

Bottom line: At the moment, the consumer is the only game in town, which, by itself, isn’t necessarily a bad thing – as consumer activity accounts for 2/3rds of the U.S. economy. My concern is that said activity is not presently resulting in businesses expanding to meet the demand (as one would expect). We, therefore, have to ask ourselves, if businesses continue to retrench (which they will as long as trade wars are a threat), how long before it bleeds into the lives of consumers?

It’s been my observation over the years that the stock market seriously influences consumer confidence, which no doubt presently speaks to the strong consumer spending numbers, and positive consumer attitudes (via the surveys). It’s also my observation, via the technicals (the charts), that the market’s a bit heavy at these levels, and, thus, a fundamental catalyst (perhaps trade war escalation with China, or, as virtually promised, inciting trade disputes with our other “partners”) could spark a significant correction that could put a huge damper on consumer sentiment and spending, which, presently being the only game in town, could morph into something ugly.

Stay tuned….

Have a nice weekend!

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