US GDP Expected to Slow

Daily Analysis - 10/03/2015

Gross Domestic Product Estimates Cut as Growth Slows

Expectations were high for 2015 to be the year of recovery and higher interest rates but recent data points to a broad slowdown in economic activity owing to a myriad of factors. Aside from employment, other macroeconomic indicators confirm the slowdown is in progress including manufacturing, factory orders, and inflation.

US GDP Forecasts Cut

GDP forecasts have been slashed across the board for the first quarter of 2015 as sell-side institutions pare back their estimates. Citing the Atlanta Federal Reserve model, the first quarter growth estimate is approximately 1.20% due to poor weather conditions slowing business on the East Coast and the port stoppage on the West Coast that dented the flow of goods through the economy. With the revisions lower in fourth quarter numbers for 2014, this is not an unexpected shift in momentum, but may nevertheless force the Federal Reserve to redraw the interest rate policy timeline. Although positive employment figures have raised speculation that the Fed will tighten policy sooner, the recent spate of economic data points to weakening underlying economic fundamentals that must resolved. In spite of the lower growth estimates, equities rallied, led by the 0.78% gain in the Dow Jones Industrial Average.

German Exports Drop

In other news, bond yields of peripheral EU countries surprising rose up despite ECB President Mario Draghi unleashing his brand new quantitative easing program to buy European assets which should drive yields lower. German exports dropped steeply, contracting -2.10% in January on expectations of a -1.50% drop. This was the biggest miss to estimates since August just as the nation was expected to rebound following the weakness in the Euro stimulating the export economy. Important developments are occurring in neighboring Austria where a bad bank is being wound down in one of the Euro Area’s last remaining AAA-rated sovereign economies. Heta Asset Resolution AG, formed on the back of assets of a failed bank, found itself short of $8.5 billion in capital. With exposure to many Eastern European economies, creditors have been forced to take steep losses as the nation risks a downgrade.

Chinese Inflation Gains

Chinese CPI growth has been steadily declining since July of 2014 until overnight data showed a rebound higher to 1.40% growth, mainly attributed to looser monetary policy and gains in consumer spending. The Lunar New Year was recognized as a major factor in the latest data for an economy that has seen producer prices contract for 36-straight months. Policy measures from the People’s Bank of China are starting to have a greater impact on the economy, but expectations remain high for further accommodative policy actions. Across the sea in Japan, more evidence is unfolding regarding the Bank of Japan’s quantitative easing program and its reduction of market liquidity in bonds and other assets. This is a troubling development especially as quantitative easing has failed to keep real growth above inflation. USDJPY hit new multi-year highs not seen since 2007 as the Yen weakens further.

EURGBP Equidistant Channel Technical Pattern

The Euro has been steadily trending lower against peers as lower interest rates combined with the newly launched quantitative easing program encouraging greater weakness in the common currency. Meanwhile, the UK economic outlook remains robust despite the slowdown in Europe as the nation considers raising interest rates during the calendar year. Since peaking in 2008, the EURGBP pair has been in a long-term downtrend, with recent momentum accelerating losses in the pair. The downward trending equidistant channel has been intact since the middle of February. The prevailing strategy is to initiate short positions at the upper channel line to be closed at the lower channel line. Fighting the downtrend with long positions is not suggested due to worsening risk-reward qualities.