US earnings growth expectations too low
Do encouraging first-quarter earnings signal a sustained period of earnings growth for companies?
Markets Weekly
17 May 2019
Week ahead
Investors look set to remain on alert as markets digest the latest developments in the US-China trade wars, with escalation of protectionism likely to affect macro data.
Given Europe’s large exposure to global trade, markets should turn their attention to May’s consumer confidence readings to gauge potential changes in sentiment in the region. May’s flash purchasing managers’ indexes for the US and the eurozone will likely provide clues on whether renewed trade tensions had a material impact on activity data. April’s readings were soft in both regions with manufacturing’s performance remaining weak and services cooling down.
Following a pick-up in Q1 UK gross domestic product growth, investors will assess whether next week’s UK consumer prices index and retail sales figures support the more hawkish tone adopted by the Bank of England. The central bank revised UK growth upwards earlier in the month despite the Brexit uncertainty.
Chart of the week
Is the US winning the trade war?
Although the US was the first to pull the trigger on trade tariffs in the trade tensions between America and China, the US suffered initially more than China. Indeed, US exports to China collapsed by more than 30% in the final quarter of 2018 compared to the previous year. The impact was much bigger than what a typical economic slowdown would usually trigger.
During the China economic slowdown at the end of 2015 and early 2016, US exports to the country “only” fell by 15% compared to the previous year. While the US relied on tariffs to improve its trade balance with China, the more centralised Chinese economy led to an initial stronger fall from US exports to China than US imports from China. In fact, imports from China continued to grow year over year until the end of 2018.
But since the beginning of the year, this dynamic has changed. US imports from China have continued to fall year over year while US exports to China have been improving, though the growth rate remains negative compared to a year ago. It looks likely that the bilateral deficit, which has continued to increase until March 2019 to reach more than $400 billion, is about to roll over.
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