Macro-Market Divergence: Trade Deficit

Trump abruptly cut the peace summit with North Korea without a deal. Ray Dalio, the hedge fund giant said odds of US recession before the next US presidential election have declined to 35% from 50% six months ago. The Swiss franc is the best performer, bringing our CHF Premium deeper into the green. China's February PMI slumped further to reach 49.2, highlighting the divergence between the economy and financial markets. US Q4 GDP finallly was released, coming at 2.6% (vs exp 2.2%) from 3.4% in Q3.  Yesterday, we shed light on the slwdown in US housing. Today we take a look at the swelling US trade deficit. 

One of the core elements of Trump's political brand is closing the trade deficit, especially in goods. Yet on Wednesday the US trade deficit sprang to $79.5B compared to $73.9B expected. That will be a further drag on Q4 and along with other soft recent data it means that growth in 2018 will likely be below 3%.

Yet the key reason the dollar has remained so solid is that growth in the high 2% range, which remains better than other developed countries. That's all the reason that the deficit keeps rising.The risk shifts what kind of drastic measures will be taken by the White House to close the gap, and weighing on global growth. It's a potential viscous circle that would intensify if Trump were to win reelection.

In terms of market moves, yields are a driver once again. US 10-year yields rose 4.6 bps to 2.68%. Yields have been chopping near 2.60% for weeks but may have found a bottom and that may lead to a bounce, particularly if the US and China can make a trade deal. On that front, Lighthizer was hawkish in his comments to Congress Wednesday but said he believed a deal was likely.

The US gets a lift from higher than expected US Q4 GDP, but with the figure coming in well below Q1 supports the notion of US growth converging down with the rest of the world.