Dollar on the front foot
Despite GDP data showing the US economy contracted slightly in the first quarter of the year, the dollar is on the front foot this morning following a late rally in US stocks, helped by talk that the US might soon announce trade “deals” with some of its partners, and better than expected earnings results from Microsoft and Meta after the close of business. The euro and sterling are both down about a cent from yesterday morning’s levels, trading at around $1.1290 and $1.3280 respectively, leaving EURGBP largely unchanged at about £0.85. The yen has also lost ground to the dollar after the Bank of Japan kept interest rates on hold overnight and lowered its forecasts for both growth and inflation on account of recent trade developments.
In bond markets, US 10-year yields were largely unchanged, having fallen steadily over the past week or so, but 2-year yields fell further as Fed rate cut expectations firmed some more with the best part of 100bps now priced in by year-end. German and UK 10-yields outperformed equivalent US yields, both ending lower on the day, with 2-year yields also nudging down amid some firming of ECB and Bank of England rate cut expectations as well (with about 67bps and circa 100bps respectively priced in by year-end).
According to the preliminary GDP estimate, the US economy contracted at an annualised rate of 0.3% in Q1 2025 (or a non-annualised fall of -0.07% q-o-q) following growth of 2.4% (+0.6%) in the final quarter of last year. Due to a jump in imports – reflecting a front-running of tariffs – net exports subtracted almost 5% points (annualised) from GDP growth, partially offset by a build-up of stocks, which added just over 2% points to growth. Consumer spending growth slowed but remained positive (at just under 2%), while private investment rebounded after contracting in Q4. Despite the headline GDP number, the underlying state of the economy remained positive in the first quarter, though obviously that was before the “Liberation Day” tariffs announced on 2 April. Separately, headline and core PCE inflation both eased in March, to 2.3% and 2.6% respectively from 2.7% and 3% in February, while the ADP jobs report showed private employment rose by a modest 62k in April, down from a gain of almost 145k in March.
The Euro area economy surprised to the upside in the first quarter of the year, according to the flash GDP estimate, with growth picking up to 0.4% q-o-q from 0.2% in Q4 2024 helped by a return to growth in the German and French economies (after both contracted at the end of last year). Ahead of tomorrow’s inflation data for the Euro area, headline (HICP) inflation in Germany eased to 2.2% in April from 2.3% in March, though core inflation looks to have reaccelerated having fallen in February-March.
Looking to the day ahead, economic data due include final manufacturing PMI readings for April in the US and UK; the ISM manufacturing index (April) and weekly jobless claims in the US; and mortgage lending/approvals for March in the UK.