April 9th, 2012
After the U.S. trade deficit unexpectedly widened five percent to $52.6 bln in January, RBS Securities looks for “that move to have more than reversed in February. In our view, the two main stories for February are oil and China.” Setting aside the oil argument for a moment, RBS remarked that “The US trade balance with China swelled by nearly $3 billion in January, as Chinese companies took in fewer raw materials and rushed to ship out finished products ahead of the Lunar New Year shutdowns.” Expecting U.S. merchandise imports to drop in February in no small measure due to the China holiday effect, RBS looks for U.S. goods exports “to have firmed modestly for a third straight month (helped in part by civilian aircraft shipments). On balance, then, the trade gap in February could have narrowed sharply, suggesting less drag on real GDP growth than many feared after the January trade figures were reported.”
Tied for the smallest deficit forecast among 65 contributors, UBS Global Economics Research projects the change in February’s U.S. trade gap (e: $48.5 bln) to be an about-face of the widening that occurred in January. The firm stipulates, however, “Without the reversal that we forecast, trade likely would be a far larger drag on Q1 GDP growth than we anticipate. If the January gap were to extend into February, we estimate that trade would subtract about one percentage point from growth rather than the 0.5-point deduction that we are factoring in to our forecast for real GDP growth of 2.3% at an annual rate.” Calling for Lunar New Year “payback”, UBS forecasts a roughly $4 billion decline in US imports from China in February. “Chinese dollar-value exports to the US have already been reported down sharply in February. That decline also occurred last year and was mimicked in the US trade accounts in a drop in reported US imports from China. (These data do not show a perfect fit from month to month—probably partly reflecting voyage durations and partly measurement issues, but the Dec- Jan-Feb pattern is suggestive.)” Regarding concerns about slowing global demand, UBS notes that the ISM export orders index had risen to a 12-month high in February before ebbing somewhat in March. “Our all-economy ISM index remains at a level that is historically consistent with real GDP growth at just above 3%.”
With UBS at the top of the range of contributed forecasts, Wrightson ICAP projects this year’s early timing of the Lunar New Year holiday to show “a misleading improvement” in the trade deficit, one that allows U.S. February imports from China to fall by roughly 20%, or $7 billion, in non-seasonally adjusted terms. In this week’s edition of The Money Market Observer, Wrightson specified, “Imports from China are likely to fall sharply in Thursday’s report for purely technical – and temporary – reasons. Any improvement in the bilateral deficit with China in February would be reversed in March. The potential impact of a holiday distortion does not seem to be factored into most forecasts. However, any favorable surprises in the trade deficit would quickly bring warnings of a reversal in the following month. As a result, a large surprise in the trade report might not move the market’s expectations for the advance estimate of Q1 GDP on April 27 as much as would normally be the case.”
Wrightson has worked out that since 2000, February U.S. imports of consumer and capital goods have risen in seasonally adjusted terms in each of the five years in which Lunar New Year fell after February 5, and have fallen in five of the six years in which the holiday began before February 5. Given the extremely early date of the holiday this year, we have penciled in a decline of 3%, or roughly $3 billion, for this category of imports in February. Combined with moderate gains in exports and little change in the energy trade balance, that would result in a decline of roughly $4 billion in the overall deficit, to $48.5 billion. Wrightson concludes, “This is a volatile and unpredictable report. The key point here is that the China impact needs to be examined independently.”
J.P. Morgan Economics Research sees only marginal improvement in the U.S. trade gap from January ($52.6 bln) to February (e: 51.3 bln), as rising petroleum imports overcompensate for falling goods imports from China. “We believe both the nominal and real values of goods imports declined 0.2% in February. Container data reported for several major US ports point to a drop in US imports in February. And the trade data reported by China also look consistent with a decline in imports in the US for the month. However, separate data on volumes and prices of petroleum imports point to strong growth during the month, and we think this could have offset some of the weakness in imports of other goods.” JPM forecasts nominal goods exports increased by 0.7%, with volumes up 0.4%.” Although it cautions that late-Q1 data raise concerns about possible slowing ahead, JPM considers that data over the last few of months are “consistent with the forecast of 2.0% real GDP growth in the first half of the year.”
With the second highest nominal February trade deficit forecast among primary dealers (e: 53.5 bln), Citigroup Global Markets expects real net exports to subtract 0.6 pp from Q1 GDP, which it still anticipates can reach 2.0% AR. The primary dealer forecasts an 8.8% q/q rise in imports in the Jan-Mar period that will more than offset an expected 6.3% q/q climb in exports. For the balance of the year, Citi expects quarterly growth in exports to run faster than that of imports with H2 export growth exceeding H2 import growth by 1.7 pp. Trade’s contribution to GDP would thus be positive in the second half of this year but still be small, adding 0.1-pp in each of Q3 and Q4.
Foreign exchange strategists at HSBC Global Research are already eyeing the wellspring for fresh evidence of a reversal in trade and currency flows in March. In an Asian FX Comment published today, HSBC reflected on China’s “shocking large -USD31bn trade deficit in February” and called the consensus expectation for the March trade balance “largely neutral – a slight -3bn deficit before presumably rising back into material surplus later in the year.” Faced with the first consecutive set of monthly trade deficits since 2004, however, HSBC says March data will “likely reinforce the shift in the market since the beginning of the year to price-out any lingering [RMB] appreciation expectations, and may even encourage some in the market to position for some topside USD-CNY on the back of this number.”
In Monday’s Global Macro Daily, researchers at Barclays Capital pondered the chances of a new round of quantitative easing if real U.S. GDP growth is below 2.0% in H1 12 and the unemployment rate is higher than current levels (Q1 average 8.2%) by the end of Q2. “The odds would have certainly gone up, given the soft employment report and worsening financial conditions in Europe.” BarCap says the focus is now likely to shift to Tuesday’s Chinese trade data, from which it expects a March trade deficit of “around $3 bln”. The team writes, “While the headline balance is indicative of the Chinese economy’s pace of rebalancing, more relevant to the market near term will be the strength of exports (a gauge of global demand) and imports (a gauge of Chinese demand). We expect export growth to edge lower from January–February’s 7% before stabilizing in the coming months.”
To the extent that dealers have been tying past and future U.S. growth rates to their expectations of QE3, the Q1 GDP report carries significant weight. But since the advance report on first quarter output does not come until April 27 (i.e., after the outcome of the April 24-25 FOMC meeting), dealers will use proxy inputs like Thursday’s February trade deficit for the full quarter’s impact on GDP. Some will attempt to draw more opportune inferences through interpretation of China’s March trade balance available tonight. Sorting through the Lunar New Year noise will itself be a challenge for dealers but renewed vigor in China’s exports should provide evidence that the U.S. will also benefit from a moderate rise in global demand.