Market Wire - US GDP: Bad from far, good from close

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

The American economy roundly missed expectations in the first quarter, shrinking at a 1.4 percent annualized rate - but weak exports and a fall in inventories contributed most of the weakness. Markets were prepared for a sub-par print, but the number will generate awkward political optics for the White House - and for officials at the Federal Reserve, who are expected to hike rates by 50 basis points next week.

Data released by the Bureau of Economic Analysis this morning showed exports slumping as the global economy weakened, with net exports deducting -3.2 percent from the headline number. 

Inventories subtracted -0.84 percentage points from overall growth, but this likely represents a hangover from the prior quarter, when backlogs at ports and in intermodal transportation corridors forced businesses to order more product than needed. This effect is likely to fade in the coming months. 

A continued decline in fiscal spending took a -0.48 percent negative toll on overall growth. This effect is expected to grow in 2022 as stimulus efforts fade. 

Consumer spending grew 2.7 percent in the quarter, down from a 3.3 percent gain in the prior quarter, and below expectations for a 3.5 percent increase. Spending shifted from goods to services for a third consecutive quarter.

But real final sales to domestic purchasers - a measure that removes trade and inventories, and is used by economists to estimate the robustness of domestic demand - rose 2.6 percent. This suggests the underlying economy remains strong. 

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

Treasury yields rose slightly, and the dollar climbed, up roughly 0.5 percent on a trade-weighted basis as we went to pixels. 

The Japanese yen endured a whipsaw session last night, falling through the 130 mark before staging a modest rebound. Selling picked up pace after the Bank of Japan said it would continue to buy unlimited volumes of bonds in its effort to keep 10-year yields capped at 0.25 percent, but lost momentum when a official said, “excessive volatility in currency moves is undesirable”, warning that the Ministry of Finance would take “appropriate action as needed”. The yen’s drop has exposed a series of emerging fault lines in global currency markets, signalling a realignment in safe haven flows, forcing depreciation in the Chinese yuan, and threatening a return of the “carry trade” that dominated exchange rate moves ahead of the global financial crisis.