Fed Keeps Transitory Language In Face Of GDP Collapse

Yesterday’s GDP announcement was the rotten cherry on a rather unappetising Q1 from the United States. 0.2% growth on an annualised basis is the equivalent of 0.05% on the quarter so for all the wailing and gnashing of teeth that the UK’s 0.3% caused, we can now see that the UK grew at six times the rate that the US did in the first three months of this year. Wags were also quick to point out that market expectations are therefore that the Eurozone economy is set to grow as much as 15 times the rate of the US between January and March; their GDP release is due next week.

Exports were the obvious laggard, crashing under the weight of weather related supply chain issues and a strong USD. For all the criticism that blaming the weather for the US economy’s travails gets you, the GDP release backed those thoughts up. Overall exports fell by 7.2% in Q1 having grown by over 4% in Q4. Within those numbers, services exports were 7.3% higher, while goods were down 13.3%. The weather and strikes at large ports on both the Atlantic and Pacific coasts are to blame for this, one has to believe.

Fed sees weakness as transitory

Courtesy of the data calendar, we had the Fed weighing in on the US economy only a few short hours later. The Federal Reserve stuck to its guns and reiterated that the slump in Q1 is largely as a result of ‘transitory’ factors and that growth will pick up in the second half of the year. They went on to say that consumer sentiment remained high within in the quarter but it is once again inflation and the labour market that will be the driver of monetary policy.

While snow and worker disputes are transitory factors and have now been resolved, it is difficult to see just how transitory a strong US dollar is. Saying that, the USD in April endured its worst month since October 2011. The focus swings to next Friday’s payrolls report; a good number with decent wages and the market will be more prepared to disregard the Q1 weakness in favour of a recovery through the rest of 2015. A poor number and bets that the Fed will have to change its tone will only increase.

The initial GDP announcement sent USD tumbling, with EUR/USD getting close to 1.12 and GBP/USD grazing against the 1.55 level before retracing through the Asian session. The dollar weakness was helped by a slip in European bond yields as German inflation rose to 0.3% on the year and investors sold bonds that were only giving them a negative interest rate in the first place. As deflation fears lessen globally, the urge to buy debt with a negative coupon should also decrease.

Soft central banks

The biggest loser overnight has been the kiwi dollar following the latest RBNZ meeting. “The bank expects to keep monetary policy stimulatory and is not currently considering any increase in interest rates” said Governor Graeme Wheeler. He continued that “it would be appropriate to lower the OCR (base rate) if demand weakens and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.” Once again this is an example of a central bank attempting the soft intervention of talking one’s currency lower without actually having to resort to rate cuts.

Likewise the Bank of Japan stayed its hand yesterday on adding more stimulus to the Japanese economy even despite cutting its growth and inflation forecasts once again. Inflation numbers from Japan are expected overnight tonight and should show a second consecutive month of 0% inflation.

What’s happening elsewhere?

The day ahead features the latest German unemployment numbers at 08.55 alongside inflation numbers from Italy and the US with personal income and spending numbers from the latter too. It is to those income numbers that USD bulls will look for some salvation following a poor beginning to Q2.