As the saying goes, the devil is in the details. The long-awaited first quarter GDP report crossed the wires well below expectations, though the dollar was able to hold support as component data and inflation numbers kept bulls in the game. For those traders sitting on the sidelines as the event risk passed, the morning hours of the US session were tense.
After the release, EURUSD spiked to a new record just above 1.3680; though without follow through, many market participants quickly flipped and pulled the pair all the way back to 1.36. In the wake of the GDP number, USDCHF completed a triple bottom formation with a turn on 1.2005 that quickly led to a 100-point surge. Seemingly unfazed by Japanese data released earlier in the Asian session, USDJPY was certainly jostled by the US numbers. The pair swung to 118.90 before reversing back to previous resistance at 119.75. Finally, GBPUSD was nearing the end of a 180-point rally before New York session event risk. Conversely, the pairs retracement from 2.0045 was the smallest percentage of its initial move.
The Commerce Department is developing a nasty habit of disappointing breakout and event-risk traders. Many traders and analysts (myself included) hailed the first quarter Gross Domestic Product release as a promising trigger for FX volatility. The worlds largest economy has seen growth cool considerably over the past year, allowing other countries to overtake the US. In the past few months, the overcast looming over growth outlooks has growth thicker - even Alan Greenspan said that a recession towards the end of the year was a possibility. With todays numbers in the books, the threat of a hard landing is even more real. According to the governments figures, the economy grew 1.3 percent annualized over the first quarter of the year. This compares to the 2.5 percent pace from the previous period and the 1.8 percent rate expected by economists. The pessimism from the four-year low in growth was offset somewhat by the component data however. Breaking the data down, the housing market, exports and inventories proved to be the biggest burden for the period - hardly a surprise. Residential investment fell 17 percent in the first quarter, which was foreshadowed by monthly labor, starts and sales numbers. On the other hand, steady consumer spending was joined by an unexpected rebound in business inflation. Altogether, few numbers really surprised a market that was already undercutting the official consensus. Whats more, this report is open to big revisions (as was evidenced by the forth quarter adjustments).
In contrast to the disappointing growth numbers, the inflation components of the quarterly report accelerated to new highs. The GDP Price Index advanced to a 4.0 percent pace of inflation, the fastest in 16 years. At the same time, the Employment Cost Index sped up to a 3.5 percent annual gait over the first quarter for its own two year high. While the ECI was impressive in itself, the wage and salary components 1.1 percent jump was far more concerning for inflation hawks. At seven-year highs, income growth is clearly paving the way for consumer-led price pressures to trickle down to the closely monitored PCE and CPI measures. This considered the Fed cannot lower rates to support growth even as the economy sputters. Instead, the policy board will continue to watch inflation and growth until one pulls back or otherwise gets so far out of control as to force the groups hand.
Equities traders have a lot to consider from todays growth report. While the level of overall growth is raising concerns, the rebound in business investment and steady consumer spending open the doors to a second quarter rebound. By 15:20 GMT, the NASDAQ Composite was the only index in the black enough to register a positive change at 2,555.14. The Dow was officially up but only fractionally at 13,105.99 while the S&P 500 slipped 0.18 percent to 1,491.56. Though the weeks rally stalled a few big names were releasing earnings reports that were calling out for movement. Dow component Microsoft reported a 65 percent jump in first quarter profit that floated the PC makers shares 4.3 percent higher to $30.36. Though the tech sector was finding blue chip support, Broadcoms $1.69 or 4.8 percent drop to $33.17 on a sub par second quarter revenue forecast was reminding traders that there were detractors keep the overall market in place.
The intensified divergence between stale growth and hot inflation did little to clarify the outlook for the Feds next move for Treasury traders. By 15:20 GMT, the benchmark ten-year note was trading 3/32nds off its open at 99-17 with a yield that was one basis point lower at 4.684. Bonds made a similar move losing 3/32nds to 98-01 as yields dropped a basis point to 4.875.