Growth slowed to its lowest rate in four years, but personal consumption rose to its highest level in a year.
First quarter gross domestic product growth was revised to 0.6% from initial estimates of 1.3%, reaching the lowest rate since fourth quarter 2002. The larger than expected revision was a result of a larger than expected drag from trade, higher rise in imports and lower rise in exports, as well as falling inventories.
But the U.S. consumer continues to provide the silver lining for of today’s disappointing GDP report. The personal consumption expenditure component was revised up to 4.4% from the initial 3.8%, reaching its highest level since first quarter 2006. The figures suggest the U.S. consumer will be instrumental in preventing a hard landing in U.S. growth and may even help stave off a rate cut this year. The latest figures on consumer spending are due tomorrow, with April personal spending expected to have risen to 0.4% from 0.3%, thereby helping to stave off fears from deteriorating housing.
The question to ask going forward is what impact a correction in U.S. stocks would have on personal consumption. In the event that U.S. housing takes a turn to the worst, as maybe indicated in falling building permits and existing home sales, the added affect of falling equities on personal consumption can place a heavy burden on aggregate demand. The role of the U.S. consumer is increasingly paramount considering the retrenching in capital expenditures.
The decline of 4,000 jobless claims to 310,000 defied expectations of a 4,000 rise, shedding fresh evidence of improvements in the labor sector as far as unemployment insurance. The stability in jobless claims has been running counter to deterioration in the establishment survey of the Labor Department, showing broad declines in payrolls. Yesterday’s release from the ADP estimate on private payrolls slowed to 97,000 in April from a revised 61,000 in March, undershooting forecasts of 115,000 to 120,000. The ADP report suggests that the April non-farm payrolls may come in weaker than the consensus forecasts of 140,000 after 88,000 in March. The ADP forecast of private payrolls has proven to be increasingly effective in predicting the direction of non-farm payrolls.
The larger than expected increase in May Chicago PMI to 61.7 from April’s 52.9 and the jump in the employment index to 57.3 from 50.5 is another key support for the dollar. The new orders component jumped to 71.1 from 56.5, while the prices paid index also soared, coming in at 70.2 from 64.9.
The 0.1% rise in April construction spending and the upward revision to 0.6% from 0.2% is also helping to maintain stability in the greenback.
The stronger than expected rise in Canada’s first quarter GDP to 3.7%, annualized from 1.5%, further supports our bullish stance on the loonie, particularly against GBP and AUD. Caution against fresh bearish positions in USD/CAD ahead of Friday’s U.S. payrolls, which may deliver an upside surprise.
GBP/CAD breaks the key 61.8% retracement
Support at 2.1140 eyeing medium term target at 2.09. Today’s data will serve as a stabilize to the U.S. dollar rather than as a booster to it, with tomorrow’s reports playing the bigger role in determining the fate of the underlying short positions in the greenback. The U.S. dollar could come under a new wave of selling in the event that payrolls fail to surpass the 110,000 to 120,000 territory and core PCE price index remains under 2.1%. A rise in the unemployment rate to 4.6% would also be considered as a major factor in sustaining expectations for a Fed easing. The dollar should obtain a major end-of-week boost in case payrolls come in more than 110,000 and the unemployment rate shows no increase. Any increase in the core PCE price index from 2.1% would be dollar positive in the event that payrolls come in above 110,000. The manufacturing ISM due at 10 am EST will be essential in determining the overall comeback in manufacturing.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY (212) 644-4220a.laidi@cmcmarkets.com
