Fourth Quarter GDP Released At 8:30 AM

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By: Kent Engelke | Capitol Securities

There is a strong probability the economy ended last year with the longest stretch of 3% or better growth since 2005. Consumer spending is solid. Business investment spending is accelerating. Housing is robust and rebounding. GDP is expected to rise by 3.0% after a 3.2% gain in the third quarter and 3.1% in the previous period.

I think the tax cuts amplified by an increase in monetary velocity should permit a first quarter growth rate in excess of 3.0%, the first such year of 3% plus growth since 2003-04. And then there is the dollar which is around three year lows, a decline that should make US products more competitive. Against this backdrop, JP Morgan’s Dimon is suggesting a 4% pace.

Wow! Growth at this rate would shatter all assumptions.

President Trump presents today at Davos, the first President to speak since President Clinton. President Trump is the antithesis of the leaders of Davos…economic nationalism versus globalism.

As I have commented several times, global leaders are still espousing multipolarity while their societies have endorsed economic nationalism. Many have pontificated China will fill the void as the US focuses domestically.

It is very evident why China has adopted this globalization philosophy. China is an export dominated economy defined as their growth is dependent upon the health and trading practices of the west, specifically the US. If the US changes philosophy, it has a major impact upon China. It is generally accepted an export dominated country is a sign of weakness not strength.

Commenting about global trade, global trade is thriving after Trump’s first year. Data is suggesting world trade rose by 4.1% in three-month year-on-year terms in November. Exports from the Euro zone are up almost 8% in 2017. Asian trade is up about 5%.

Is this a function of an accelerating US and global economies and from the recognition that Trump’s rhetoric is just where his words fall short from reality?

What I find interesting is that many are now expecting four interest rate hikes in 2018, the result of growing trade and accelerating global economies led by the US. A month ago, two rate hikes were all that was to be expected believing the Fed was off course with their forecasts of three.

If four hikes were to occur and if historical relationships are to be maintained, 2018 could be regarded as the worst year for Treasuries in over 50 years, eclipsing the 1994 fiasco when rates were then increased at a rate faster than expected. During 1994, the economy and profits expanded at a greater rate than expected, but equities were flat to down.

Commenting about yesterday’s market activity, averages were again bifurcated with the Dow posting a nominal advance and the S & P / NASDAQ flat.

Last night the foreign markets were up. London was up 0.41%, Paris was up 0.87% and Frankfurt was up 0.08%. China was up 0.28%, Japan was down 0.16% and Hang Sang was up 1.53%.

The Dow should open nominally higher ahead of Trump’s 8:00 AM speech and 8:30 GDP data. The 10-year is off 7/32 to yield 2.65%.

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