Derek Halpenny, European Head of GMR at MUFG, notes that in a week when we have had an FOMC statement that only included minor alterations, the dollar remains under downward pressure – the DXY index today has fallen to the lowest level since August of last year.
“The failure of the FOMC to provide an assessment of risks in any way, leaves a June rate increase as more unlikely now. Of course, yesterday’s GDP report will only reinforce that view. The drop in real GDP growth to just 0.5% in Q1 will no doubt raise concerns, especially with business equipment investment down a notable 8.6% - the worst decline since Q2 2009 as the economy was emerging from the GFC-induced recession.
The impact of that drop was reinforced by a 2.6% Q/Q drop in exports. The export performance over the last three quarters (+0.7%, -2.0% and -2.6%) is also the worst since the GFC-induced recession. There have now also been three consecutive quarters of inventory destocking which has weighed on overall real GDP growth. Indeed, the deceleration of real GDP in Q1 was the third consecutive quarter of slowdown.
Of course the main story behind the overall real GDP slowdown has been the slowdown in real consumer spending and since Q2 2015 when consumer spending growth was 3.6%, there have been three consecutive slowdowns there as well to 3.0%, then 2.4% and 1.9% in yesterday’s Q1 report. But this should not be viewed alarmingly – the average Q/Q growth rate for consumer spending still stands at 2.9% since crude oil prices began falling in mid-2014.
The good news therefore is that strong employment and rising real incomes (real disposable income jumped 2.8% Q/Q annualised in Q1 and the savings rate increased to 5.2%) points to the potential for consumer spending to recover, helping to lift overall real GDP growth. Three consecutive quarters of slowing real GDP growth is not uncommon during this post-GFC expansion phase – this is the fourth time. With crude oil-related investment in structures a factor again and with crude oil prices rising and with the US dollar notably weaker now, there is certainly the potential for some recovery in activity going forward.
If that was to transpire, then the more telling information from yesterday’s GDP data will have been the jump in the core PCE inflation rate to 2.1% - the highest level since Q1 2012. Very quickly, on the back of some better economic data, concerns could begin to rise about underlying inflation pressures. That won’t perhaps happen imminently and a June rate increase does look less likely now, but the two DOTS assumed by the Fed for this year may yet materialise just at a later date than most had assumed. That suggests the current under-performance of the dollar is unlikely to turn into a sustained trend.”
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