Markets were supported by better than expected earnings, a dovish Bank of Japan (BOJ), and Stronger GDP out of the US… or was it?!?!
Corporate Earnings
US corporate earnings for the first quarter are well underway. Earnings were projected to fall nearly 4% on average, with the normalization of 2018 Tax Reform. Thus far, the average is approximately -2.2% and revenue is growing by 5% in comparison to Q1 2018. This is great news since tax reform as a whole would represent a fall of roughly 14%. The draw back is while 5% revenue growth is still good, it is a rather meager pace of growth.
Bank of Japan
The BOJ met last week and left rates unchanged. They did, however, provide forward guidance that they do not intend on raising rates until sometime in early 2020. That reassured markets that the current rate environment will be sustained through 2019. It also signaled underlying concerns of weakness by the BOJ. It could be related to the US/China trade war, which has greatly impacted their export levels.
US GDP
Q1 2019 GDP was expected to be lackluster.
1) Q1 is typically slow for the consumer, which makes up nearly 70% of GDP.
2) A government shutdown acts as a drag on economic output, projected at .2%.
3) A harsher than average winter was expected to reduce economic output.
Well, so much for assumptions! Q1 2019 GDP is initially projected at 3.6%. The main driver being State and Local spending. It increased from 1.3% in Q4 2018 to 3.9% in Q1 2019. Perhaps in response to the government shutdown, but it is not clear at this point. Another major contributor to growth was a narrowing trade deficit, as exports increased, and imports decreased. Drawbacks to GDP were decreases in consumer and corporate spending (both expected).
Conclusion
All three factors helped contribute to short-term sentiment and production. At the same time, all three carry longer term risk as revenue slows, growth remains tepid, and GDP gains in state and local spending dissipate. The ‘normalization’ of these factors will act as a detractor to economic activity in the long run.
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