Morgan Stanley Slashes Q1 GDP To 1.5%; Next Up - Wall Street Starts Cutting 2011 EPS

And the hits, er, cuts, just keep on coming. Q1 GDP, which everyone now has forgotten was supposed to be the inflection point in the new and improved American Golden Age story: remember that whole payroll tax benefit which was expected to contribute 1.5-2% GDP points, is being cut by everyone. From an original consensus of nearly 4%, this number is now down more than 50% according to Wall Street's cadre of so-called economists. The latest lemming to join the Jan Hatzius downgrade wagon (yes, folks: Goldman is and always will be the key factor in any swing in convention wisdom as today's move in crude demonstrates so vividly) is Morgan Stanley's own David Greenlaw who a month ago couldn't contain his enthusiasm about the explosion in US economic activity. So much for that giddyness... And now that Q1 GDP is done, look for Q2 and H2 GDP downward revisions, and screams of protest demanding more fiscal and monetary (QE3) stimulus. Since the fiscal route is a dead end, we let readers conclude what that means for the future of the DXY and all the carry trade derivatives.

From Morgan Stanley:

Very weak report. Both exports (-1.4%) and imports (-1.7%) posted sharp declines in February after big gains in January, with the volatility probably partly a result of seasonal adjustment problems with the Chinese New Year. The weakness in February came even with substantial further upside in prices. In real terms, goods exports (-3.7%) and imports (-3.0%) both plummeted, leaving the real merchandise trade deficit only slightly narrower after a sharp widening last month, significantly worse than we expected. Incorporating these results, we lowered our Q1 GDP forecast to +1.5% from +1.9%, with our forecast of the net exports contribution falling to -0.4pp from +0.1pp.

All major export categories were weak in February, with the biggest declines in autos (-9.3%), industrial materials, and ex aircraft (which saw a good gain as expected) capital goods (-2.7%). The pullback in autos was surprising given the sharp further ramp up in auto assemblies in February and March, and the drop in industrial materials came even with sizable upside in prices, with real industrial materials exports down 4.5%.

On the import side, a steep drop in volumes after a big run up over the prior few months more than offset a further jump in prices to leave petroleum products down 4.4%. Capital goods (-5.1%) and autos (-10.9%) also posted big  declines.

We were expecting the real goods trade deficit to reverse the sharp widening seen in January, but instead it only narrowed to $49.5 billion in February after rising to $50.3 billion in January from $46.0 billion in December. Even with a decent narrowing in March, the real goods trade gap in Q1 will be significantly wider than in Q4. There is some likely offset from translation of the real Census Bureau real oil imports to the BEA figures (which have  predictably for a number of years shown big seasonal weakness in real oil imports in Q4 and Q1 and big upside in Q2 and Q3), but it still now appears likely that trade will be a modest net drag on Q1 growth instead of a minor add. We see net exports subtracting 0.4pp from Q1 GDP growth instead of adding 0.1pp. We now see real exports rising 5.5% instead of 14% and real imports gaining 7% instead of 11%.

Next stop: major downward revisions to everything, up to and most certainly including FYE 2011 EPS.


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