Yesterday’s surprise rebound in US Q2 GDP was all the more unexpected by the fact that none of the recent data had suggested such a strong rebound in economic activity.
The rebound certainly raises the stakes with respect to the potential timing of any future Federal Reserve rate rise, but does need to be tempered by the fact that it’s not unknown for an initial US GDP reading to come in on the high side,
only to get revised lower in the coming weeks.
This could be just one of those occasions, as was the case in Q4
, last year when the initial reading came in at 3.2% and was subsequently revised lower, and this year in Q1 which came in at 0.1%, only to be revised lower to -2.9%.
This tendency for GDP numbers to be revised lower
, probably reflects the caution surrounding last night’s Federal Reserve statement, which, another monthly reduction of $10bn, came across as rather more dovish than the market had anticipated, notwithstanding the dissent from Philadelphia Fed’s Charles Plosser
, who objected to the retention of the sentence “considerable time after the asset purchase program ends” with respect to the range for the Fed funds rate.
While it’s not too much of a surprise to see this passage left in it now, it does raise the prospect that the Fed could start to lose credibility
, if they start to ignore the evidence of an improved employment outlook.
In the lead up to last nights Fed decision the expectation has been that the committee would be much more hawkish than they actually were
and this softer tone helped to pull US markets off their lows. Bond markets were slightly more difficult to convince with the 2 year yield remaining at one year highs.
Today the focus returns to Europe
where we can expect a mixed open ahead of the latest inflation numbers for July which are expected to remain unchanged at 0.5%, on the headline and 0.8% for core prices respectively, though given recent weak CPI readings from Spain and France this week
these numbers could well come in lower.
Unemployment data is also high on the radar today,
particularly the latest German numbers after last month’s surprise 9k rise. Expectations are for a 5k fall with the headline rate unchanged at 6.7% for July.
Away from Germany, unemployment remains the elephant in the room,
though we have started to see a fall in the Spanish headline rate, youth levels remain high, and it is here that the concerns remain focussed. The latest Italian numbers are expected to remain at 12.6%, but youth unemployment is still well north of 40%, while the latest EU numbers are expected to stay unchanged at 11.6%.
Irrespective of how these numbers come out any further action from the European Central Bank remains unlikely in the short term,
ahead of the TLTRO’s, especially as the euro is now starting to ease back against the US dollar.
In the US the latest weekly jobless claims
are expected to nudge back above 300k after last week’s big drop to 284k.
– the euro has continued to drift lower as it looks to close in on the November lows at 1.3300. We have resistance at the previous lows at 1.3475, but would need to see a move back through 1.3500 to retarget the 1.3570 level and then on to 1.3640.
– the pound has remained under pressure continuing its slow declines of the last few days with the lack of any rebound suggesting that we could well see a move towards 1.6845 and the 100 day MA. We need to see a rebound back through 1.7030 to stabilise in the short term and argue for a retest of 1.7100.
– continues to tread water just above 0.7900 with the bias remaining towards the downside with support at the 0.7870/75 area. The euro needs to overcome last week’s high at 0.7940 and then trend line resistance at from the highs in March at 0.7990, to stabilise. The pressure remains for a move towards 0.7780, with any rebound needing to overcome the 0.8000 level to stabilise in the short term.
– the US dollar hit its highest levels since early April yesterday, briefly trading above 103.00 and breaking above the trend line from the 105.50 highs at 102.50. There is nothing to suggest though that we won’t continue to trade within the broad range that we’ve been in over the last six months. We have resistance at 103.00, and beyond that at 104.10, the April highs.
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