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Market Briefing: Still-ravenous US consumers defy slowdown fears in first quarter, anchors dollar higher

CalendarApril 27, 2023

The US economy grew more slowly than anticipated in the first quarter, but below-the-headline details suggest consumer spending remained strong, even as the Federal Reserve continued its generationally-extreme tightening campaign. Data released by the Bureau of Economic Analysis this morning showed the economy expanding at a 1.1 percent annualized pace in the January-through-March period as fiscal and monetary tightening effects hit home. Economists had expected a headline print closer to the 1.9 percent mark.

Residential investment subtracted -0.17 percent from the headline growth number - less than in previous quarters - and overall investment spending cut -2.34 percent. Trade played a modestly-beneficial role: net exports added 0.11 percent to overall growth - but inventories offset this by subtracting -2.26 percentage points. 

Overall personal consumption grew at a 3.7 percent annualized pace in the quarter, jumping from 1 percent in the final three months of 2022, and contributing roughly 2.48 percent to the headline print - the biggest net addition since the middle of 2021.

Real final sales to domestic purchasers - a measure that removes trade and inventories, and is used by economists to estimate the strength of domestic demand - climbed 2.9 percent, suggesting that underlying demand remained remarkably robust.

Separately, initial claims for unemployment benefits fell to 230,000 in the week ended April 22 from 245,000 a week earlier - providing more evidence of still-strong growth momentum.

Treasury yields climbed and the dollar climbed as odds firmed on a hike at next Wednesday’s Fed meeting - and as the likelihood of a late-2023 rate cut fell. Commodity prices dropped and equity futures weakened as investors positioned for a demand slowdown paired with still-tight financial conditions.

Tomorrow’s personal income and spending data should provide further insight into the handoff into the second quarter. The Federal Reserve’s favoured wage growth indicator - the Employment Cost Index - could also have significant implications for currency markets.

House Republicans managed to narrowly pass a bill that would raise the debt ceiling for one year and roll back many of President Biden’s policy initiatives. Democrats have said the ‘Limit, Save, Grow Act’ is “dead on arrival”, unlikely to pass the Senate, and certain to be vetoed by the President. But the initiative suggests that Speaker McCarthy is able to rally his unruly party  around a common platform - something that both raises and lowers the likelihood of an 11th-hour deal to raise the limit.

The euro continues to strengthen, hitting a one-year high around the 1.11 mark in early-morning before falling back around the US data release.

The yen is tightly rangebound as the Bank of Japan begins its first two-day policy meeting under new Governor Kazuo Ueda. Officials are overwhelmingly expected to leave key policy settings unchanged for now, but the mere possibility of another upset like December’s widening in the yield curve control band is keeping traders on their toes. Markets remain broadly convinced the central bank will move to tighten policy in the latter half of the year, but conviction is ebbing, and the yen has underperformed against its major rivals for months.




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Karl Schamotta

Karl Schamotta

Chief Market Strategist

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