US growth faltering, no Fed rate hike expected till year-end

Last week’s market action

Yesterday’s session may well go down as one of the most important of the year. US Q1 GDP was delivered well below expectations at +0.2% vs Exp +1.0%. A strong dollar, a sharp drop in energy sector capex, bad weather and port closures impacting imports and exports are the main reasons for the notable economic underperformance. The market response was dramatic with some very significant technical breaks. EURUSD drove sharply higher with US dollar weakness forcing a break of the 1.11 handle for the first time since the start of March in a move that extended 200 pips to top out at 1.1196. The FOMC statement halted the upside with the initial interpretation being mildly hawkish as the Fed put some of the bad economic data down to transitory factors. However, overall the FOMC statement in our view was if anything dovish in that they pointed towards Dollar strength impacting on economic momentum and this is not transitory. Markets generally took the statement in their stride without any lasting reaction. Despite bad GDP data yesterday, T-Notes took another leg lower with 10yr yields climbing above 2%. But this was due to sharp downside for the bund as well as large supply coming on- line from the Treasuries $29bn 7 yr auction. Crude oil also made a significant move higher thanks to US dollar weakness and Cushing Crude inventory data showing a decline in stock piles for the first time since November. WTI crude mad a new 2015 high tracking up above $59.

Today’s View

This morning initially saw large extensions of some of yesterday’s moves with the EURUSD climbing up above the 1.12 handle and equities coming under heavy pressure. Conditions have now stabilised but we head into the US session with a bearish view on equities, US Dollar and T-Notes. Economic data scheduled today comes in the form of Initial Jobless Claims, Personal Income and Spending and Chicago PMI. We feel that traders are still very much thinking about the medium term outlook which is looking more and more fragile as the US economic data picture continues to consistently disappoint. The rumours of some kind of PBoC QE or LTRO have now been quashed and Japan failed to deliver a QE increase last night despite downgrading both inflation and growth forecasts and so equity index prices appear toppy in our view. For crude oil we are going with the six week uptrend as we look for WTI to close out the month at 2015 highs.