Markets reacted this week to rumors of a new trend bubbling beneath the economic landscape – what would appear to be a reversal of fortunes between the U.S. and Europe. The data highlight this week causing the reaction was the surprisingly low U.S. GDP growth of 0.2 percent against expectations of a 1 percent gain.
There were several factors playing into this performance, like frigid weather and the West Coast port strikes, but another significant issue was the weak trade data in recent months. U.S. exports are down four months in a row, with the strong U.S. dollar clearly to blame. Europe releases its first print of Q1 GDP on May 13, and coincidentally, expectations are for 1 percent growth in the quarter. One of the main drivers of European growth is growing exports, which have been boosted by a depressed euro.
To be sure, the reversal is not really that much of a surprise. Over the last two quarters, earnings releases for U.S. companies have consistently warned that the strong dollar was hurting their sales abroad.
Meanwhile, Europeans have been quietly cheering for the dollar to beat up their currency as a way to stimulate exports. Granted, this primarily helps Germany – which is the last European economy to need help – but it boosts the region as a whole.
Europe also has benefited from the perception that the European Central Bank’s quantitative easing will spur growth in the eurozone. In fact, the spate of global central banks that cut rates earlier this year seems to have put a floor in the fears that pervaded markets earlier this year.
And finally, markets are cautiously optimistic about an improvement in the Greek situation. Prime Minister Alexis Tsipras this week switched out his controversial finance minister for a new negotiating team that seems to be a bit more cooperative in dealing with the rest of Europe.
Our View: So is this a trend or a blip? Our colleagues at City National Rochdale are looking for a rebound in U.S. GDP in the second quarter as consumer demand picks up from many of the tailwinds we have seen this year – income and wealth gains, low interest rates and sentiment. While we understand the changing sentiment about Europe, the history of the crisis in Europe has been hope, then disappointment, as reality sets in. However, we still believe that by the end of the year we will have strong economic growth in the U.S., and an improving European economy.
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