Place your bets on US GDP!
Navarro’s Big Economic Picture: Hu Was That
Guy?
I’m still trying to figure out the point of the
Bush Administration hosting the state visit of Chinese President Hu Jintao — at
least from any American perspective. We got zero-zip-nada on pressing trade
issues other than a few promises to buy a few billion bucks worth of planes and
other goodies — but nothing on a scale that will diminish our growing trade
deficit with China. On two of the big issues — piracy and currency revaluation
— the U.S. got absolutely nothing of substance.
Of course, from the Chinese perspective, this was all very prestige-enhancing.
The President of Buccaneer Nation firmly held his ground against the American
hegemony. The result was a political zero sum game in which President Hu’s
stature in China was raised by about the same amount Mr. Bush’s stature in China
was lowered.
The interesting thing here is that if China does not revalue soon, it is going
to wind up with a bubble economy as foreign direct investment will continue to
flood into China seeking cheap, yuan-denominated assets. At present, to
accommodate this investment, China sucks in the yen and euros and dollars into
its reserves and then prints a bunch more yuan to cover the tab. No more
effective inflationary printing press has yet been invented.
This Week’s Market Movers — US GDP Over and
Under Scenarios
It’s likely to be a kind of wait and see week
until the first quarter US GDP numbers hit the wire on Friday. The big question
is how close to the consensus of 5% real growth the actual numbers will be.
There’s a lot of ways this could go, which means there’s a lot of chances to
make a few bucks.
Let’s say that the number comes in at 5.5% or even 6%. This would buckle the
knees of the stock market, as it would dramatically increase the probability of
at least two more Fed rate hikes and possibly more. Meanwhile, the bond market
would tank as yields on the long end rise. So the “over number†is clearly a
bearish scenario.
That doesn’t necessarily mean the “under number†— say 4% to 4.5% — is
necessarily bullish. Sure, it would subtract fuel from the Fed’s fire and
greatly enhance the “one and done†possibility of a May close for the current
interest rate hike cycle. However, it would also signal softer growth than
expected, validate the flat yield curve as a recessionary signal, and raise
concerns about a softening economy and lower corporate earnings.
So gentlemen — and ladies — place your bets
on US GDP!
Here’s the economic calendar for the week. On
Tuesday and Friday, we get consumer confidence and consumer sentiment
respectively. No big surprises likely there. New and existing home sales on
Tuesday and Wednesday, respectively, are likely to be a bit more interesting.
However, with mortgage rates now hitting 6.50%, no amount of healthy housing
numbers are going to change bearish concerns about the future.
Finally, Fed Chairman Ben Bernanke will wax eloquent before Congress on Thursday
so that definitely has market moving capabilities, particularly if he directly
says “yes†or “no†to the question of whether the Fed will stop raising rates
soon.
Last take:
Earnings continue to roll in and rising oil prices continue to roil the
markets. Put your seat belt on.
Peter Navarro is a business professor at the University of California and
the author of the best-selling investment book “If It Rains in Brazil, Buy
Starbucks.†His latest book is "The Well-Timed Strategy.â€