Tuesday May 5

Stocks fall after disappointing U.S. trade data. The S&P loses 1.2% to 2,089. Weak trade balance results reaffirm last week’s soft GDP numbers. The trade deficit widened to $51.4B from a $35B deficit in April. Economists had expected a deficit of $42B for April. These numbers include a 7.7% increase in imports, as ports on the West Coast reopen after strikes end and the strong dollar makes imports less expensive. The already weak first quarter GDP will likely be revised down as a result. The Bureau of Economic Analysis expected a $45.2B trade deficit when reporting 1Q GDP results. Knowing this, BoAML expects the numbers to be downwardly revised to -0.5%. On a more optimistic note, the ISM non-manufacturing index rose to 58.7, a number that is typically in line with 4% annual GDP growth. The euro rises against the dollar to $1.1196 as the dollar index loses 0.4%. The bund yield rises 7bp to 0.52% and the Treasury 2.17% in tandem with European yields.

The trade deficit for goods and services increases 41% in March from April. Exports increase only 1% while imports increase 7.7%. In particular, domestic demand for foreign cars and mobile phones increased. These numbers pose a dilemma for the Fed when raising rates later this year. Rising imports for consumers are a strong indicator for consumption. However import figures may be distorted (on the high end) because of the reopening of West Coast ports. Last week’s exports assumed that net exports reduced GDP by 1.25%, which taking into account today’s number may be increased to 1.95%. The import numbers showed a 20% increase in consumer goods and a 10% increase in vehicle imports, reflecting a strong pickup in domestic consumption.

Negotiations between Greece and the IMF are in a stalemate. Creditors are not discussing debt reforms until Greece agrees to economic reforms to unlock €7.2B in bailout funds. The European Commissioner for Economic Affairs says, “debt issues can only be discussed after we have agreeed a reform program.” It appears doubtful that creditors will accept a haircut on their debt. This complicates negotiations, as the IMF recently said that a haircut may be necessary to help lower debt levels. The IMF needs debt levels to be lowered so that they can continue to lend to Greece under its own restrictions. The IMF accounts for half of the €7.2B of funds that are due to Greece. After the November 2012 agreement Greece is expected to cut its debt levels to 120% of GDP by 2020, and 120% by 2022. As of February this metric was predicted to fall to 170% this year, however after Greece’s new deficit expectations the debt-GDP ratio is projected to increase to 180.2% this year.

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Tuesday May 5

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