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Exports and imports appear to be turning around. Unfortunately for U.S. GDP growth, however, real imports are growing faster than real exports at present.

Real Net Exports Continue to Exert Drag on GDP Growth

The U.S. deficit in international trade in goods and services widened to $48.5 billion in January from $44.3 billion in December (top chart). The outturn came as little surprise because preliminary data on goods trade that were released last week indicated that an increase in the overall trade deficit in goods and services was in the cards. Although the value of exports rose by $1.1 billion in January, the deficit increased sharply due to the $5.3 billion jump in the value of imports of goods and services.

Some of the increase on the import side of the ledger reflects higher imports of petroleum products, which were up by $2.6 billion in January. That said, there was broad-based strength in imports in the first month of 2017, with capital goods ($668 million), auto vehicles and parts ($899 million) and consumer goods ($2.4 billion) all higher on the month. Overall exports would have been stronger had exports of civilian aircraft and parts, which are notoriously volatile on a monthly basis, not dropped $1.2 billion in January. Outside of capital goods, the other broad categories of exports were either essentially unchanged or higher on the month.

Taking a step back from the volatility that is inherent in monthly data shows that growth in exports and imports is starting to pick up again. As shown in the middle chart, the value of exports in the November-to- January period was up 4.3 percent on a year-over-year basis. The value of imports grew 5.3 percent during that period. Some of this acceleration in export and import values reflects higher commodity prices in recent months. That said, growth in real exports and real imports have strengthened as well in recent months. This pick-up in real export growth is consistent with signs of stronger economic growth, at least on the margin, in many of America's major trading partners. Domestic demand in the United States, which influences real import growth, has also been generally resilient recently.

Speaking of real measures, real exports of goods rose 0.4 percent in January, which follows on the heels of the 3.6 percent gain in December. In other words, export growth entered 2017 with a fair amount of momentum. Unfortunately for U.S. GDP growth, however, there is even more momentum on the import side of the ledger as real imports of goods have grown in excess of 1 percent per month over the past four months (bottom chart). Real net exports sliced 1.7 percentage points off of overall GDP growth in Q4-2016 as real exports fell 4.0 percent while real imports jumped 8.5 percent. Although real net exports likely will not depress overall GDP growth in Q1-2017 as much as they did last quarter, the drag from the external sector could amount to as much as a full percentage point of GDP growth due to continued strength in real imports.

Solid labour market data in February

The jobs report for February due on Friday seems to be the last thing which potentially could halt a Fed hike at the upcoming meeting (see next section). Preliminary labour market data for February have been solid, with low initial claims and Markit PMI employment index pointing to significant labour market progress. We estimate non-farm payrolls increased by 190,000 in February in line with the recent trend and in line with the consensus. We estimate private services was the main contributor to job growth with 160,000 new jobs but we also expect the progress in manufacturing employment observed during the last two months continued in February, with an increase in manufacturing employment of 20,000 as manufacturing activity indicators continue to point towards progress. We estimate unemployment remained flat at 4.8% and that average hourly earnings increased 0.3% m/m, implying a small increase in the wage growth rate of 2.8% y/y. The pickup in wage growth is due to a correction from the January figures, where wages in financial activities fell 1.0% m/m and thus dragged down total wage growth.

The January report showed that 227,000 new jobs were created. However, the unemployment rate increased from 4.7% to 4.8%. The increase in unemployment is mainly due to an increasing participation rate and should therefore not be considered a sign of labour market weakness - on the contrary.

As growth has picked up pace after the slowdown in H1 16, we expect jobs growth to continue around the current pace in coming months, which should be sufficient to tighten the labour market further. That said, there is still slack left in the labour market (see spider web chart on the next page), as the number of marginally attached and part-time workers for economic reasons is still high and the number of long-term unemployed is still elevated.

Fed is set to hike unless the jobs report is extremely weak

In Friday's speech, Fed Chair Janet Yellen confirmed that the Fed is set to hike at the upcoming meeting ending on 15 March, unless the jobs report for February is extremely weak. We probably need to see jobs growth below 100,000, a higher unemployment rate and no improvement in the weak earnings data in January before the FOMC members change their minds. As we expect the jobs report to be good, we expect the Fed to deliver. Markets have priced in an 85% probability of a Fed hike in March.

We now expect the Fed to hike three times this year in March, July and December, as the Feb seems less worried about inflation and has increased its weighting on labour market and growth data. In her speech, Yellen hinted that four hikes this year means that monetary policy becomes neutral and we think the Fed wants to keep monetary policy slightly accommodative, as there is still slack left in the labour market. We still expect the Fed to hike three-four times next year, as the neutral rate should move higher.

The U.S. trade deficit widened to $48.5 billion in January from a $44.3 billion deficit in December. The trade deficit was right on the consensus expectation.

January exports rose for the second consecutive month (+0.3% month-on-month), driven higher by automotive exports (+10.8%) and industrial supplies (+5.8%). In real terms, exports rose 0.4%.

Imports rose 2.5% month-on-month in January owing to increases in the import of consumer goods ex autos (+4.9%), and capital goods (+1.3%). In real terms, imports of goods rose 2.1%, marking the fourth consecutive month of advance.

Key Implications

Another month, another unsurprising trade report. The pop in the U.S. dollar late last fall is likely a factor that has fed into the widening of the nominal trade deficit in January. Since U.S. dollar strength makes foreign goods cheaper for Americans, and is also a sign of a healthy economic expansion relative to other countries in the world, we expect to continue to see imports to rise in upcoming months.

The elevated level of the trade-weighted dollar along with firming of domestic demand is a major theme behind our view that net trade will likely exert a drag on U.S. economic growth this year. However, uncertainty about the future of U.S. trade policy makes this view less clear.

Canada's trade balance started the year in a surplus position, extending the string of surpluses to three months. Exports were up 0.5%, while imports slipped 0.3%. As such, the surplus widened from $447 million in December to $807 million in January. In real terms, exports were up by 1% and imports rose by 2.5%.

The strength in exports was driven in large part by a bounce back in motor vehicle and parts exports (+7.7%), as well as a 13% increase in farm fishing and intermediate food products. In contrast, exports of the volatile aerospace products (-9%), consumer goods (-4%) and metal and non-metallic mineral products (-5%) provided some offset.

Weakness in imports was widespread, led by metal ores and non-metallic minerals (-10%) and metal and non-metallic mineral products (-5.5%). Imports of energy products (+12%) and motor vehicles and parts (+3.6%) provided some offset.

Canada's trade surplus with the U.S. widened to $4.5 billion in January (previously $3.8 billion), as exports rose 2.3% and imports were up by a more modest 0.3%. Canada's trade deficit with the rest of the world widened to $3.7 billion (previously ($3.4 billion) as exports (-4.4%) fell more than imports (-1.3%).

Key Implications

With growth in import volumes expected to outpace exports, net trade is likely to be a drag on growth in the first quarter of this year. However, exports are expected to gain some traction in the coming months, which will allow trade to be supportive of growth over the remainder of the year.

Indeed, strong U.S. demand - stemming in part from an expected uptick businesses investment - combined with the Canadian dollar hovering in the mid-70 US cent range throughout the year, should bode well for Canadian-made goods. Of course, the potential for protectionist measures to be implemented south of the border presents some downside risk to this outlook.

All told, the rotation in the Canadian economy towards export-driven growth should gain some traction by the second half of this year. However, with the cloud of uncertainty stemming from the potential policies of the new administration stateside unlikely to abate any time soon, we expect the Bank of Canada to remain on the sidelines for the foreseeable future.

Daily Pivots: (S1) 1.0557; (P) 1.0598 (R1) 1.0622; More.....

Intraday bias in EUR/USD remains neutral for the moment as it's stay in established range of 1.0493/1.0630. On the upside, firm break of 1.0630 resistance will argue that pull back from 1.0828 is completed. Also, rise from 1.0339 could possibly be resuming. In that case, intraday bias will be turned back to the upside for 1.0828 resistance and above. On the downside, below 1.0493 support will affirm the case that fall from 1.0828 is resuming the larger down trend. In that case, intraday bias will be back to the downside for resting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Daily Pivots: (S1) 1.0084; (P) 1.0107; (R1) 1.0141; More.....

USD/CHF's rise resumed after brief consolidation and took out 1.0145 resistance. The pair reaches as high as 1.0164 so far. Intraday bias is back on the upside. Rebound form 0.9860 should target a test on 1.0342 key resistance next. As noted before, based on neutral medium term outlook, we'd be cautious on topping at around 1.0342. On the downside, break of 1.0008, however, will indicate completion of the rebound from 0.9860. And intraday bias will be turned back to the downside for 0.9860.

In the bigger picture, prior rejection from 1.0327 resistance argues that USD/CHF is staying in a medium term sideway pattern. In any case, decisive break of 1.0342 resistance is needed to confirm underlying strength. Otherwise, we'll stay neutral in the pair first. In case of another fall, we'd expect strong support from 0.9443/9548 support zone. Meanwhile firm break of 1.0342 will target 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

Daily Pivots: (S1) 113.58; (P) 113.85; (R1) 114.16; More...

USD/JPY continues to stay in tight range below 114.74 for the moment. As the pair is bounded in range of 111.58/114.94, intraday bias remains neutral. Near term outlook is a bit mixed as the corrective fall from 118.65 might not be completed yet. But still, in case of another fall, we'd still expect strong support from 38.2% retracement of 98.97 to 118.65 at 111.13 to contain downside and bring rebound. On the upside, decisive break of 114.94 will indicate that it's completed with a double bottom pattern (111.58, 111.68). In such case, intraday bias will be turned to the upside for retesting 118.65.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

USD/CAD has edged higher in the Tuesday session. Early in North American trade, the pair is trading just above the 1.34 line. On the release front, Canada's trade surplus edged lower to C$0.8 billion, but this easily beat the forecast of C$0.2 billion. Later in the day, Canada releases Ivey PMI, which is expected to improve to 58.9 points. In the US, the trade deficit jumped to $48.5 billion, higher than the estimate 0f $47.0 billion. On Wednesday, the US releases ADP Nonfarm Employment Change, ahead of the official Nonfarm Payrolls report on Friday.

Canada's labor market has improved, buoyed by strong employment gains. The economy added 48.3 thousand jobs and 53.7 thousand jobs in December and January respectively. This surprised the markets, which had predicted declines for each reading. The unemployment rate has also improved, dropping to 6.8%. A strong US economy has been good news for Canada, which is heavily dependent on its southern neighbor. At the same time, speculation of an imminent rate hike by the Fed has boosted the US dollar, which has jumped 2.2% since the end of February. If US nonfarm payrolls beats expectations, the Canadian dollar's slide could continue.

Donald Trump has been in office for over a month but still continues to create controversy on an almost basis, much to the consternation of the markets. Still, the US dollar remains strong, buoyed by a strong economy and the increasing likelihood of a rate hike at the upcoming Fed policy meeting on March 15. The likelihood of a March hike as jumped to 84%, according to the CME group, compared to 33% just a week ago. Why the huge jump in odds? One reason is that Fed policymakers have sent out strong hints that the Fed is leaning towards raising rates next week. Earlier in the year, the Fed sent out signals Fed sent out signals that it would stay on the sidelines until it had a clearer picture of Trump's economic agenda, such as an outline of tax reform or fiscal spending plans. That has changed, as the Fed appears poised to move ahead despite the lack of any details about the administration's economic policy. This week's job numbers will be critically important, as strong numbers will likely boost the odds of a March move as well as push the greenback to higher levels.

Daily Pivots: (S1) 1.2207; (P) 1.2254; (R1) 1.2284; More...

GBP/USD's fall resumes by taking out 1.2213 and reaches as low as 1.2181 so far. Intraday bias remains is back on the downside for retesting 1.1946/86 support zone. As noted before, consolidation pattern from 1.1946 should have completed with three waves to 1.2705 already. Break of 1.1946 will confirm our bearish view and resume the larger down trend. On the upside, break of 1.2346 support turned resistance is needed to invalidate this view. Otherwise, outlook will remain cautiously bearish in case of recovery.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

EUR/GBP - 0.8668

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term down

Original strategy  :

Buy at 0.8550, Target: 0.8650, Stop: 0.8510

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.8600, Target: 0.8700, Stop: 0.8560

Position : -

Target :  -

Stop : -

 
As the single currency has maintained a firm undertone after recent rally from 0.8403 low and the breach of previous resistance at 0.8640 adds credence to our view that the fall from 0.8857 has ended at 0.8403, then further gain to 0.8705-10 would be seen, however, loss of near term upward momentum should prevent sharp move beyond 0.8740-50, risk from there is seen for a retreat to take place later.

In view of this, would not chase this rise here and we are looking to buy euro on pullback as 0.8600 should limit downside. Below support at 0.8547 would suggest first leg of rebound from 0.8403 has ended, bring weakness to 0.8520-25 but support at 0.8509 should contain downside and bring another rise later. 

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.