Experts Talk Trade Gap, Claims, China's Inflation

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 11.

Ted Wieseman, Morgan Stanley

The overall [U.S. January] trade report was better than expected as exports (down 0.3%) and imports (down 1.7%) both pulled back a bit after huge prior runups from the spring lows, but the latter more so, causing the trade gap to narrow to $37.3 billion from $39.9 billion. Narrowing in the real [inflation-adjusted] trade gap was similar to the nominal result, a significantly better outcome than we expected. Details on capital goods imports and exports were also slightly better than expected. As a result, we boosted our first-quarter gross domestic product forecast to +2.6% from +2.0%.

Trade is likely to swing to a notable positive for growth over the rest of the year as emerging markets growth substantially outpaces U.S. domestic demand.

Michelle Meyer, Barclays Capital

[U.S.] initial jobless claims slipped 6,000, to 462,000, in the week ending Mar. 6, following a 30,000 drop, to 462,000, the prior week. However, the four-week moving average still increased to 475,500, given the sharp weather-related gain in claims in the second and third weeks of February. Continuing jobless claims increased 37,000, to 4.558 million, only partly reversing the 113,000 drop the prior week.

We expect jobless claims to trend lower through the month, supporting our forecast for a strong March employment report. We believe it is likely that payrolls could climb roughly 250,000 in March, reflecting more than 100,000 Census hires, a reversal of weather effects, and an underlying trend improvement in jobs.

T.J. Bond, Bank of America Merrill Lynch

China's national statistics bureau and the People's Bank of China just released macroeconomic data for January and February. Overall, there were no major surprises. The market slightly underestimated inflation, fixed-asset investment, industrial production, and new loans, while it overestimated a bit on retail sales. Most attention is focused on CPI inflation, as the market is watching for any signals of rate hikes.

We think the PBoC is unlikely to hike rates in the next several weeks (or even in the first half of 2010) because of the yuan-induced rise in year-over-year CPI inflation. Exit strategy will likely focus on quantitative measures such as [required bank reserve] hikes and loan control in the first half of 2010, and interest rates could be hiked only in the second half, in our view. The data also support our call of 11.2% year-over-year GDP growth in the 2010 first quarter.

Jack Adkins, Action Economics

Chart patterns continue to suggest high risk of a major bear market in Treasuries during the summer and early fall. In previous interest rate cycles, the bond vigilantes moved in advance of the [policy-setting] Federal Open Market Committee. Given the current Fed focus on the fragile economy, conditions are ripe for the markets to front-run the FOMC again.

Chart patterns suggest that bond yields may rise this year in advance of the Fed, and the rate cycle may resemble the 1999 episode—when the bond market completed 75% of its eventual bear market move before the Fed's first rate hike.

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