US growth brings optimism
Following the Fed meeting on Wednesday, eyes shifted to yesterday’s GDP announcement from the States. While the statement from the FOMC was almost laser-focused on the unemployment dynamics of the US economy, there is not much to be optimistic about there if decent growth is not forthcoming.
Whilst the headline number missed against expectation – 2.3% vs 2.7% annualised – the internals and revisions to previous numbers were broadly positive. Consumer spending in Q2 rose by 2.9% with trade also helping overall output higher. The laggard was private investment, an issue that has been a drag on the US economy throughout the global financial crisis.
No dip in Q1
What was thought to be a quarter of contraction in Q1 was revised higher yesterday, moving from -0.2% to 0.6% signalling that the transitory effects of poor weather and labour disputes at some large ports were not as bad as had been previously expected.
The most encouraging noise for the US dollar however, came in the form of the latest core PCE inflation reading. PCE – or Personal Consumption Expenditure to give it its full name – is the Federal Reserve’s preferred measure of inflation and came in at 1.8% vs 1.6% expected.
In a vacuum, this data is not enough to drive the Federal Reserve to decide to hike interest rates. Combined with the longer-term improvements in the jobs market and the need to slowly bring these hikes in so as to not spook markets however, we see the decision only going one way. Failing a disaster in the next few job market reads, you can pencil in that September rate increase now.
Familiar problems in Europe
While inflation may be driving higher in the US the same cannot be said for the Eurozone, as we highlighted yesterday. For those who haven’t been paying attention, it is a familiar story of high-but-falling unemployment and low and persistent inflation. It will be interesting to see what damage the Greek situation did to wider European economic confidence and output. I think we can chalk up yesterday’s poor unemployment numbers in Germany to this.
Today’s Euro area flash inflation should confirm that the inflationary picture has worsened in Europe in the past month and confirm that the ECB will be purchasing bonds via its QE plan well into 2016 and possibly beyond. Oil is getting very cheap, very quickly and will keep the ECB printing the cash to keep the deflationary wolf from the door.
Really? Again?
The European single currency fell through yesterday’s session mainly on the increased belief of rate divergence between the European Central Bank and the Federal Reserve. News out of Greece that a deal may not be signed between it and its creditors before a EUR3.2bn loan repayment to the ECB on August 20 had me having flashbacks. We still feel that there will be new elections in Greece in the coming months but that market impact will be slight if a deal is reached in a timely manner.
We nearly managed to go a week and not talk about Greece. Maybe next week?