US GDP Disappointment Sends Dollar Sliding

Weekly Report - 01/08/2016

Interest Rate Hike Probability Falls After Preliminary US Growth Figures Miss Expectations


The latest data from the US Bureau of Economic Analysis with greeted with outward pessimism on Friday after showing that first quarter growth was actually 0.80% with early estimates of the second quarter coming in well below estimates of 2.60% after printing at 1.20%.  As a result, the US dollar retreated significantly while expectations of an interest rate hike during the second half of the year fell.

Last Week

An abundance of data from across the globe continued to underline the challenges facing both advanced and developing economies alike.  Gross domestic product figures did show a mixed outlook, with the preliminary estimates of UK GDP coming in well above expectations while US GDP suffered a substantial setback after optimism surrounding a more hawkish Federal Reserve.  Amid the backdrop of the Brexit referendum, UK GDP surprisingly climbed to 0.60% expansion during the second quarter, beating forecasts of 0.40% growth by a wide margin.  Although growth is expected to taper in coming months amid the uncertainty of how the decision to leave the UK will impact the domestic economy, those data points will be unavailable for several months to come.  Meanwhile, in spite of a FOMC decision that was widely anticipated, the tone of the statement that accompanied the latest interest rate decision was slightly more hawkish, giving credence to the idea of rates raising during the second half of the year.  However, those hopes were dashed after the preliminary estimate of second quarter GDP printed at 1.20%, less than half of the 2.60% anticipated with the prior quarter’s results also revised lower to 0.80%.  This announcement saw the dollar continue to fall, sending gold prices charging back to the upside.  Outside of the US and Europe, Asia was dominated by the announcements of a new fiscal stimulus package and added monetary stimulus from Japan.  The Japanese government unveiled a fiscal package worth JPY 28 trillion in a bid to boost the economy and escape another deflationary spiral.  However, the decision by the Bank of Japan to expand its ETF purchases while providing additional financing to exporters was met with disappointment, sending the USDJPY pair back towards 100.00, ending the week at 102.05.


The Week Ahead

Data in the coming sessions will be from across the globe, starting out with China which is set to release  the latest data on the state of manufacturing with the official and Caixin Purchasing Managers Indices.  The official figure is expected to stay on hold at 50.0, the threshold that separates expansion from contraction while the Caixin Manufacturing PMI is expected to improve slightly from 48.6 from 48.7.  Following China, Europe is set to report on the manufacturing outlook as well with PMI data from the aggregate Euro Area, Germany, Spain, Italy, France, and finally the United Kingdom.  With the exception of France and the United Kingdom, the remaining regions are expected to show ongoing expansion in manufacturing purchases during the upcoming releases.  The United States is also set to report on manufacturing metrics later in the week as well.  Outside of manufacturing, the United Kingdom is expected to report on the latest construction fundamentals which are expected to show a deeper contraction in the Construction PMI from 46.0 to 43.8.  The biggest upcoming event for the UK this week and the Pound is the Bank of England interest rate decision due on Thursday from the Monetary Policy Committee.  The market is currently anticipating that the Central Bank will cut the benchmark rate by 25 basis points to 0.25% from 0.50%.  The Reserve Bank of Australia is also expected to cut interest rates this week to 1.50% from the current 1.75% following another downtick in consumer inflation.  To round out the week, the US Bureau of Labor Statistics will be reporting on the state of unemployment and payrolls on Friday.  Payrolls are expected to come in at 170,000 jobs added with the jobless rate forecast to hold at 4.90%.


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