US GDP was far worse than the 1.00% expansion expected, printing at a meager 0.20% after a quarter of worsening economic fundamentals. This is a far cry from the initial estimates of 3.00% growth after the confluence of poor weather conditions coupled with the West Coast port shutdown curbed the flow of goods and services through the American economy. This is complicating the Federal Reserve’s decision-making process just as the FOMC Members prepare markets for the reality of higher interest rates through incessant jawboning and obvious hints towards the impending hawkish shift. Furthermore, the pervasive weakness in consumption which remains the backbone of the economy is still not in an environment of recovery as evidenced by the latest consumer confidence figures. Even in inflation were to rebound, a central tenant of any future changes to Federal Reserve policy, hiking interest rates on a weak economic backdrop does not seem like prudent policy despite the desperation to normalize policy.
While according to the latest preliminary figures real consumer spending actually beat expectations, edging higher by 1.90%, the number was still well below the 4.40% expansion seen in the fourth quarter of 2014. Consumer sentiment is an important component and the recent drop off is evidence that consumers are not in fact convinced that the economy is in the midst of a recovery, rather more indicative that individuals are concerned about the outlook. The reaction in financial markets was quite substantial, with the S&P 500 ticking lower as the dollar sold-off. Commodities gained, with the gold briefly breaking above $1210 before hitting resistance at $1216 and retreating. Nevertheless, tonight’s FOMC Statement is the real event driving markets as investors globally glean hints about the future of the Federal Reserve’s monetary policy. Any shift in language towards a more hawkish viewpoint will be positive for the dollar while an accommodative stance will see precious metals gain further.
GDP Disappointment Sounds Far and Wide
Market Trends - 29/04/2015