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Weekly Economic Monitor -- Trade, the Dollar, and Inflation

By: Scott J. Brown, PH.D., Raymond James

Trade, the Dollar, and Inflation – The advance estimate of 1Q21 GDP growth is expected to show negative contributions from net exports and the change in inventories. Private Domestic Final Purchases (consumer spending, business fixed, investment, residential fixed investment), a better measure of underlying domestic demand, should be a lot stronger. All else equal, a wider trade deficit puts downward pressure on the dollar, but while the trade-weighted dollar has risen relative to the end of last year, and by itself is not a significant issue in the inflation outlook. Prices of raw materials have risen, but that is likely to be transitory. Inflation in finished imported goods has remained moderate.

This Week – The FOMC is widely expected to leave short-term interest rates and the monthly pace of asset purchases unchanged, while Chair Powell is unlikely to cover new ground in his press conference (but you never know). The advance estimate of 1Q21 GDP growth should be quite strong, likely held back by slower inventory growth and a wider trade deficit. Focus on Private Domestic Final Purchases (consumer spending, business fixed investment, and residential fixed investment), which should be a lot stronger. In his address to a joint session of Congress, President Biden will make his case for his infrastructure plan and spending priorities.