U.S. GDP: Strike one

U.S. GDP: Strike one

The first look at Q1 growth disappointed, but U.S. earnings reports are coming in stronger than expected; French elections are heating up; financial markets may be getting desensitized to politics

"We want to bring Kim Jong Un to his senses, not to his knees"
Admiral Harry Harris, head of US forces in the Pacific

US GDP: Strike one  Q1 GDP disappointed at 0.7% annualized growth, below the consensus forecast of about 1.0% and far weaker than 4Q2016's strong 2.1%. But this figure is the first of three GDP releases for each quarter from the Department of Commerce. This one (the "advance estimate") is prepared well in advance of the full set of underlying data needed to get a definitive measure. Given the surprising weakness in the figure, expect any changes between this and subsequent releases to be scrutinized especially carefully.

One reason for the miss: the price index used to measure inflation came in at a higher-than-expected 2.3%. Since this figure is used in the calculation of GDP, a higher number generates a lower GDP figure, all other things being equal. But one component of the GDP figure was particularly disappointing: personal consumption for the quarter rose only 0.3%, vs. an expected 0.9% -- and Q4's 3.5%.

US earnings: From strength to strength About three weeks into earnings season, overall results have been surprising on the upside. The scale is significant: as of April 11, 79% of companies exceeded profit estimates, and 66% beat on sales, according to Bloomberg. Possibly even better: the analysts who follow listed companies are, on balance, raising their estimates for earnings for the full year 2017 instead of lowering them, as was often the case last year.

French election: The other shoe With the presidential race now down to neophyte Emmanuel Macron and far-right Marine Le Pen, both candidate are seeking to shore up their support:  Le Pen, by attempting to move to the political center, and M. Macron by working to overcome his inexperience in national politics, as well as his background in investment banking.  Mme Le Pen went so far as to resign – though temporarily – from the presidency of the National Front, the party founded by her hard-right father. Macron, for his part, collected endorsements from most main-stream politicians who had opposed him during the first election. The refusal of hard-left candidate Jean-Luc Mélenchon to endorse him could in fact work to his benefit.  The election will take place on May 7.

Politics and markets: Crisis fatigue? The past 18 months have seen some major political surprises: the Brexit referendum, the Trump win, the UK snap election, and elections in France. With the upcoming elections in Germany and elsewhere, surprises could very well continue. 

Financial markets, however, appear to have gotten better at taking such surprises in stride. In the U.S., the oft-cited CBOE S&P500 Volatility Index (the VIX) traded as low as 10.30 as of last Friday morning1, a low not seen since July 3, 2014 – and before that, on January 24, 2007.

While there's talk of the end of the so-called "Trump bump" since the election, the S&P 500 Index has risen some 14% since the election, and remains some 3.1% ahead since the January inauguration – despite high-profile legislative stumbles and communication mis-steps. European markets tell a similar tale, with the EURO STOXX 50 Volatility Index reaching as low as 11.16 on March 17, 2017, just before the French election campaigns began – a low not seen since early 2005 – and a nice pullback just after the results of the first round came in.


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