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The third estimate of 1Q19 U.S. real GDP growth came in at 3.1% q/q saar, with an inventory build-up and net exports still providing a big temporary boost during the quarter. Growth has slowed in 2Q19, with consumption still strong but business fixed investment weakening. Durable goods orders and new homes sales came in weak, and confidence is waning as evidenced by a sharp decline in consumer confidence and a dip in consumer sentiment.
Nonfarm payrolls increased by 224,000 in June, above consensus expectations, but an unsurprising rebound after a weak May. The unemployment rate ticked up to 3.7%, as did the labor force participation rate to 62.9%, with labor force gains offsetting some weakness earlier in the year. Wage growth is decelerating, growing 0.2% m/m and 3.1% y/y for all workers (0.2% m/m and 3.4% y/y for production and non-supervisory workers). While the pace of job growth may have slowed, the labor market still remains tight.
The 2Q19 earnings season began this week, with 24 companies having reported (5.2% of market cap). Ourcurrent estimate for 2Q19 earnings is $39.21, rising 1.5% y/y so far, but we expected approximately 5.3% y/y growth this season. Thus far, 83% of companies have beaten on earnings, while 38% have beaten on revenue. Slower global growth, lower oil prices, a stronger USD, margin pressures and fading effects from tax reform will continue to weigh on earnings this quarter. Healthcare is expected to lead earnings given M&A activity, and utilities, communication services and consumer discretionary are likely to have positive earnings growth. We anticipate low to mid single digit earnings growth for 2019 as a whole.
Core CPI was up 0.3% m/m in June, the largest increase since January 2018, driven by apparel and housing, bringing the y/y increase to 2.1%. Headline CPI only inched up 0.1% m/m, for a lower 1.6% y/y increase, as energy continued to decline. Similarly, May PCE only nudged higher by 0.2% m/m for both the headline and core PCE deflator, and headline PCE, the Fed’s preferred inflation measure, fell slightly y/y from 1.6% to 1.5%, while core remained at 1.6% y/y. Persistently low inflation may provide the Fed with a rationale for a rate cut in July.
The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% at its June meeting. However, the FOMC has shifted to a more dovish tone, abandoning “patience” and instead vowing to “act as appropriate to sustain the expansion,” implying easing could be on the horizon. In its economic projections, it downgraded inflation materially from 1.8% by the end of 2019 to 1.5%, acknowledging its persistently low levels. The futures market is currently pricing in multiple rate cuts this year, and Jay Powell’s testimony to Congress reinforced the likelihood of a rate cut in July.