US Macro: More uncertainty than usual for Q1 GDP – The advance estimate for Q1 GDP will be released on Friday. We expect a softening in momentum to 1.5% qoq annualised, while consensus expects growth to be stable at 2.2% (same as Q4). However, we note greater uncertainty in Q1 GDP than usual, thanks largely to the government shutdown over December-January, which led to delayed salary payments for 800,000 federal employees, and disruption to tax refunds and regulatory approvals. The high frequency data suggests activity has rebounded more quickly than anticipated, with retail sales in particular pointing to strong growth in private consumption. However, investment – for which higher frequency data is more limited (particularly for intellectual property investment) – could be the fly in the ointment. What do the tracking estimates point to? The Atlanta Fed’s tracker for Q1 implies an acceleration to 2.8%, while the New York Fed’s measure is closer to our own forecast at 1.8%. Which is the more historically accurate? Typically the Atlanta Fed measure. This differed from the advance GDP release on average by just 0.3pp over the past four quarters, compared to a 0.9pp difference for the New York Fed’s tracker. However, there have been occasional outliers, and the Atlanta Fed estimate has at times differed by as much as 1-2pp from the GDP release.
Base case for slower growth, and an on-hold Fed – Regardless of Friday’s outturn, we continue to expect an overall slowing in growth in 2019 to 2.3% from 2.9% in 2018, with quarterly annualised growth likely to dip below potential (c.1.8%) by year end. This is being driven by the fading of fiscal stimulus and the turn in the investment cycle. Given muted inflationary pressure and moderate growth, we think the Fed is unlikely to resume rate hikes anytime soon, and our base case is for no further hikes in the current cycle. At the same time, with high frequency data coming in better than expected, easing fears of a sharper slowdown, markets have priced out much of the easing that had been expected until recently, with c.20bp of rate cuts priced by year-end, vs c.35bp at the end of March. (Bill Diviney)