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US GDP Surges past Estimates

First Revision of Second Quarter Economic Growth Shows Massive Improvement

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The US economy expanded more than previously forecast according to the first revision of second quarter GDP figures.  Growth, which exceeded the prior estimate by a wide margin, means an interest rate hike is back on the table despite the weakening external picture.

Economic Activity Outperforms

Weak first quarter economic growth which was revised upwards to reflect seasonal factors was in stark contrast to GDP numbers released yesterday showing second quarter estimates revised higher from 2.30% to 3.70%.  The strong results were in large part due to rising exports, shrinking imports, personal consumption expenditures, and more importantly, swelling inventories.  Business inventories were behind much of the gains but could be potentially signaling a recession around the corner as the wholesale inventories-to-sales ratio continues to rise towards levels last seen in recessionary periods.  In another concerning signal, pending home sales only staged a modest rebound, rising 0.50% versus expectations of 1.00% gains after contracting -1.70% in the prior month.  The GDP number saw dollar momentum accelerate, mainly manifesting in gold prices which managed to stay below the critical $1132 longer-term level after bouncing off of $1120 per troy ounce.

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Japan Inc Stumbles

While Japanese Prime Minister warned earlier that the Bank of Japan was likely to miss the inflation target, slumping energy prices and weaker economic activity are risking thrusting Japan back into recessionary territory.  According to figures released overnight, the national core consumer price index slipped to 0.00% annualized from 0.10% recorded in the prior reading.  The regular figure was also weaker, falling to 0.20% from 0.40% in a sign that quantitative easing is not having the desired impact when it comes to reversing the deflationary environment that has plagued the economy for years.  Household spending managed to stage a modest rebound after tumbling in the prior reading, with spending increasing 0.60% month over month versus the prior reading of a -3.00% contraction.  Despite the gains, the figure remains in negative territory on an annualized basis.  The one bright spot amid all the data was unemployment figures which showed the jobless rate falling to 3.30% from 3.40%. 

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Swiss GDP Surprises

Speculation was high that the Swiss economy would be dealt a crushing blow after the Swiss National Bank removed the peg to the Euro in January.  However, in a startling sign, the economy managed to hold up despite the stronger Franc as evidenced by the latest second quarter GDP numbers released this morning.  Quarterly GDP managed to expand at 0.20% versus -0.20% in the prior quarter and anticipated contraction.  On an annualized basis the economy is still expanding at 1.20% even though indications were for a deceleration in economy activity.  The Swiss National Bank has recorded substantial balance sheet losses from foreign exchange exposure in accordance with the measures taken to defend the peg.  Nevertheless, this has not impaired the Central Bank’s ability to act as they still target a soft peg to the Euro of between 1.0500-1.1000 in order to keep exports relatively competitive.

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EURUSD Equidistant Channel Technical Pattern

After the surge earlier in the week, the Euro has continued to give back gains, retracing much of the earlier optimism surrounding the resolution of the latest Greek crisis and data that showed regional economies continuing to experience expansion as Mario Draghi’s asset purchase program improves financing conditions across the region.  However, stronger US data and the possibility of rising rates saw that optimism wane as the dollar staged a rebound with the EURUSD pair retreating after rallying to the upside.  The pair is currently trending lower in an equidistant channel pattern exhibiting a strongly bearish bias.  Ideal positions initiated at the upper channel line should target the lower channel line for an exit.  Should EURUSD rise above the upper channel line it could indicate a channel-based breakout to the upside accompanied by increased momentum.

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