Fed’s move of caution may look overly bold after resilient US Q4 GDP surprise
March 1, 2019
With much of the Brexit “benefit” priced in, and little additional newsflow forthcoming, sterling pared its gains yesterday after the US dollar benefitted from strong Q4 data. Meanwhile, the Trump administration’s crusade for access to the EU’s agricultural sector hasn’t ignored the UK just because of Brexit. The lead FT story this morning states that Robert Lighthizer, the US trade representative, released “negotiating objectives” for a possible trade agreement with the UK in the event of certain Brexit scenarios allowing the UK to strike external trade deals unilaterally. The news comes as no shock after the Department of Commerce released its report on whether the EU automobile industry was a national security threat, and just reiterates the appetite from the white house to obtain favourable trade terms for US farmers.
The euro feigned a rally midday yesterday, but then seemed to remember the risks surrounding the monetary and economic outlook of the Eurozone and quickly retreated again, closing around the open against USD. German February Preliminary Consumer Price Index growth came in exactly on target at 0.5%, bouncing back from the 0.8% contraction of January. The French reading was less positive for euro as expectations of a 0.4% increase were not met and inflation growth remained flat in February. Today sees the Eurozone-wide print at 10:00 GMT. Before that at 9:00 GMT we get the final manufacturing Purchasing Manufacturing Indices for individual countries, which may give us more insight into how idiosyncratic factors impact the general slowdown in the Eurozone manufacturing sector.
Yesterday, the greenback closed in the middle of the G10 currency board, beating almost all its peers in a fairly volatile session. Most of the rally was driven by the strong Q4 Gross Domestic Product reading, surprising markets with a 2,6% annualized quarterly expansion, from a 2.2% expected. This print has many wondering whether the US economy is actually slowing as previously feared by the Federal Reserve and hence, to what extent the monetary policy should remain patient. The GDP Price Index rebounded to a 1.7% quarterly, reversing the downward trend it had shown since the second quarter of the year. However, the real question may be whether this push will continue in the start of 2019, when the global slowdown and the longest-ever government shutdown might have filtered deeper into the economy. Meanwhile, the US dollar also received some support from Asian markets, where the stalled conversations between Donald Trump and North-Korean Kim Jong Un on denuclearisation, triggered some fears on Asian equities; a risk-off move that led to further haven flows into the dollar. Today, the Fed’s preferred inflation measure, Personal Consumption Expenditures Index, is released at 13:30 GMT, followed by the final February Markit Manufacturing PMI at 14:45.
The loonie held surprisingly well after a day that saw both the Current Account data and Raw Materials Price Index disappoint the expectations. After yesterday’s positive surprise in US Q4 Gross Domestic Product, today sees the Canadian version released at 13:30 GMT. The benchmark for growth in the Canadian economy is low, at a meagre 1.0% annualised. Risks are therefore tilted to the upside for the loonie especially with oil price continuing their weak uptrend, which stimulates economic activity in Canada’s large fossil-extraction industry.