Monday Musings: May 2, 2022

May 02, 2022

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Public Trust Credit Team
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U.S. GDP shrinks in the first quarter, but data suggests brighter days ahead

The U.S. closed out 2021 in strong fashion, printing a 6.9% annual growth rate in the fourth quarter. However, that trend reversed in the first quarter of 2022 as the U.S. GDP dropped 1.4%, representing the first contraction since the beginning of the pandemic. The seemingly endless supply chain issues are taking a toll on the overall economy despite consumers’ and businesses’ desire to spend, but the GDP reduction was primarily due to a widening of the U.S. trade deficit. Imports increased and exports decreased further highlighting the supply chain issues. Total net exports contracted the overall GDP figure by 3.2%, and the main expansionary category was business investment at 1.17%.

On a positive note, the economy’s most prominent driver, consumer spending, increased at a 2.7% annual rate in Q1, topping Q4 2021. Similarly, private demand grew at a 3.7% annual rate, topping the 1.8% target the Fed expects long term. Another indicator of general consumer sentiment is travel. According to STR’s hospitality figures, the U.S. hotel occupancy was 65.8% for the week ended April 23, a ~15% increase from the final week of January. Regarding TSA checkpoint figures, ~2.1 million people passed through airports in late April, a strong increase from the 1.4 million people three months earlier. Economists are projecting GDP to rise 2.6% in Q4 2022 from the year prior which would be equivalent to the GDP annual growth we saw in 2019. Despite the recurring economic struggles of inflation and supply disruptions, the resiliency of consumer and business spending is a key indicator that GDP growth should soon resume. Looking ahead, increasing inflation and waning fiscal support are expected to keep future growth in check to a moderate amount.

U.S. hawks meet Japanese doves, setting up a case for lower foreign buying

The Bank of Japan (BOJ) has doubled down on its dovish stance and yield curve control, signaling it will be stepping up bond buying to keep its yield curve controls in place. This has led to a sharp decline in the yen vs the dollar and sent Japanese investors scrambling to cover hedges or book unhedged gains. The dollar is up nearly 14% against the yen so far this year, well above its five-year peak seen in early January. The strength of the dollar is leading to substantially higher hedging costs, and Japanese investors (particularly life insurers) have signaled that they plan to reduce net foreign holdings this year. A large buyer like Japan curtailing foreign investment can leave a gap in the market for others to fill, potentially leading to higher treasury and U.S. yields over the short term.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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