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April
27
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Week In Review

U.S. GDP

U.S. real GDP increased at an annual rate of 2.3% in the first quarter of 2018, exceeding economist estimates of 2.3% growth. Personal consumption rose 1.1%. Business fixed investment jumped 6.1% while residential investment was flat. Exports rose 4.8% but imports increased just 2.6%. The personal consumption expenditures index rose 2.7% in the quarter and is up 1.7% over the last twelve months.

Our Take

The GDP report was a little better than expected, yet expectations had been declining throughout the quarter. Consumer spending disappointed dramatically in Q1, especially in light of the anticipated benefit of reduced taxes. Strong business investment will likely wane unless consumer spending ramps up in Q2. In the end, Q1 growth of 2.3% is in line with the post-recession average of 2.2%. On the inflation front, a 2.7% increase in the PCE (personal consumption expenditures) indicates that recent wage gains might be creeping into consumer prices, giving the Fed ammunition to support their tightening narrative.


Central Banks

In Draghi’s press conference, he indicated that recent soft Eurozone economic data has not shaken the ECB’s confidence in the medium term trajectory of growth and the firming of inflation. The implication of this posture from Draghi is that the ECB is likely to taper its QE program later this year with balance sheet growth ending in December. The BOJ left policy unchanged but abandoned any timeline for hitting its 2% inflation goal. This action dialed back expectations that the BOJ may raise its target rate for the 10 year JGB from the current level of zero.

Our Take

These announcements indicate that the Fed is still far ahead of the ECB and BOJ in monetary policy normalization, although the ECB is no longer seen as moving in the opposite direction. This policy divergence argues for continued dollar strengthening and some countervailing pressure against the rise in the Treasury yield curve.


Municipals

The State of Illinois sold $500 million of general obligation debt this week. The spread at issuance was wider than Illinois’ last new issue which sold last November. Illinois remains the nation’s lowest rated state.

Our Take

Illinois’ borrowing costs continue to rise which was reflected in this week’s bond sale. Illinois has struggled with unpaid bills and budget uncertainty. Investors will be watching closely as lawmakers work on next year’s budget over the next few months. Lawmakers should focus on crafting an on-time, balanced budget. The state cannot afford another budget impasse.