Weak headline Q1 US growth sees dollar tick down

The dollar lost more ground yesterday following weaker than expected Q1 US GDP data, continuing a trend of weak US data this week. The dollar fell to around $1.0730 to the euro, and has now lost more than 1/2 cent this week against the single currency, and to $1.25 to sterling, down more than 1 cent from Monday’s trading. The euro has also conceded a little room to sterling and kicks off this morning at 85.8p from over 86p earlier this week. The yen weakened to a fresh multi decade low of Y156.5 to the dollar following a Bank of Japan meeting where policy was keep on hold and no currency market intervention was announced. That weaker US GDP data also weighed on equities where the S&P 500 had seen gains early in the week, due to some solid quarterly corporates earning reports, but lost 0.5% yesterday.

Government bond yields continued to tick upwards, US 10-year yields were up another 5bps to nearly 4.7% (+10bps from Monday’s trading) while German 10-year yields were up 4bps to 2.63% and UK bonds 3bps to 4.36%. The weak GDP data further clouds the outlook for the Fed. On the face of it slower activity advocates for rate cuts but the US labour market remains robust – 303,000 new jobs added in March while unemployment remains low at 3.8% – and inflation data shows prices remaining stickier than the Fed had hoped and those later two data points argue for keeping monetary policy restrictive. The markets are pushing out the timing of a rate easing cycle beginning, which in turn, increases the likelihood of more weak quarters of growth in the US like we saw in Q1.

US growth slowed to a two year low of 1.6% (annualised) quarter-on-quarter in Q1. This is less than half the pace of the 3.4% expansion in Q4 and lower than the expected 2.5% increase. However, underlying demand is stronger than the headline figure suggests, personal spending held up reasonably well, up 2.5%, while investment rose 3.2%, helped by robust increase in residential investment as business investment growth was modest. What held back GDP, was a poor showing by exports, up just 0.9%, while government spending was also feeble. A bigger concern for the Fed might be the inflation data contained within the GDP which showed that core PCE inflation accelerated to an annual rate of 3.7% from 2.0% in Q4. At this point in the rate hiking cycle, the central bank would be hoping that underlying inflation would be trending down but this data suggest the opposite might be true.

ECB member Panetta was out with very dovish comments. He warned that the ECB needed to ease monetary policy soon. He said that  ‘unnecessary delays’ in cutting rates increases the risk of undershooting the 2% inflation target in the future and correcting that would require a return to ultra low rates. He said that ‘timely action would allow the ECB to be nimble and move in small progressive steps’ that would ‘counter weak demand and could be paused at no cost if upside shocks to inflation were to materialize’. He also said that delays by the Fed in starting their easing cycle should be no obstacle to the ECB starting to cut.

In Japan, the Bank of Japan left policy unchanged and did not- for now – announce any currency market intervention. Governor Ueda played down the Yen impact on inflation but did leave open the possibility of market intervention in the future he said there is a need to ‘watch foreign exchange and its impact on (Japanese) inflation’ and while monetary policy does not target a rate for the Yen and the current yen weakness is ‘not yet having an big impact on underlying inflation’ he did add it was one of the factor prompting the Bank to revise up its inflation forecast for 2024. He added that while the Bank is monitoring the weaker Yen, its impact on prices can be ‘ignored for now’ but he ‘could not rule out the possibility’ it might be an issue in the future.

On the agenda today we have inflation expectations in the Euro Area and US personal income and spending and PCE inflation.