Rebounding from the losses registered on Tuesday, stocks were on a mission to grind higher as soon as the opening bell was rung, dismissing the dismal US economic data that was released earlier in the morning. Managing to shake off the downward revision of Q1 GDP growth in the American economy which showed a contraction of 2.9%, along with durable goods orders for May falling by 1.0% from the previous month, the S&P was able to recoup the majority of Tuesday’s losses, increasing by 0.49% to just under 1,960 at the close.Â
It’s hard to put a positive spin on the drastic downgrade to US GDP in Q1, but looking beneath the headlines, one of the main culprits for the tumble was the fact that personal consumption expenditures plummeted from the previous print (advanced GDP reading) of 3.1%, to a paltry 1.0%.  The reason for the collapse in personal consumption was because of major revisions to the accounting of Obamacare revenues, and instead of contributing $40bn in revenue to GDP in Q1 as per the advanced reading, the final numbers showed the Affordable Care Act ended up actually subtracting $6.4bn from GDP.  One could assume that the inflow of revenue from Obamacare won’t just disappear into thin air and will most likely show up in subsequent quarters as an upside surprise, but at the very least it does raise some eyebrows as to credibility of the 2.9% contraction.
The same can also be said about the durable goods orders in May, as the proxy for business investment (non-defense, ex-air) saw a healthy increase of 0.7%, despite the headline reading showing a dip of 1.0% because of less demand from the military. Equities were happy to look at the economic numbers with a glass-half-full mentality, although the DXY came under pressure and spent most of the day exhibiting an offer tone. The Loonie was able to post some modest gains against the big dollar, though the initial drop in USDCAD was again stymied in the low-1.07s.  The 10-year US treasury was initially well bid after the numbers were released, but yields managed to recover later in the day and closed around the 2.56% mark.
Across the pond, the Bank of England’s Financial Stability report was released overnight, which was accompanied by a press conference from Governor Carney. The BoE has been having a tough time telegraphing to markets what the future path for monetary policy looks like, and the associated indecision around when the normalization of rates could occur has kept GBPUSD in check from showing too much exuberance north of 1.70. One of the reasons Carney may seem like he is talking out both sides of his mouth on monetary policy is because he is in a similar situation to when he was heading up the Bank of Canada; the housing market has taken off and in order to head off a potential bubble rates could be raised, while areas of the economy like the labour market and business lending still need the pro-growth, accommodating stance to make sure the recovery doesn’t fizzle.
The measures to curb mortgage lending that were announced in conjunction with the FSR were less stringent then markets had anticipated, with the main restrictions being a cap on high loan-to-income mortgages, along with tougher underwriting standards that call for a more adverse scenario analysis from an affordability standpoint. With an absence on any severe measures this puts more onus on interest rate policy to cool the housing market (as opposed to macro-prudential measures from the FPC) and thus we’ve seen GBPUSD pop back above the 1.70 level as implied yields on interest rate futures rising. The FTSE is essentially flat mid-way through its session, while the other major European equity indices trade in modestly positive territory with a lack of macro-economic news flow failing to conjure any large moves.
Heading into the North American open, there are only a few hours until trade flow in financial markets grinds to a halt as traders turn their attention to the US-Germany World Cup soccer match. Hydrocarbons are seeing some weight to their tape ahead of the opening bell, with Brent dipping to $113.50/barrel after a breather in terms of any further reports of escalating violence in Iraq. Personal consumption data, along with the PCE inflation, for the month of May was released earlier this morning, and the results were fairly mixed.  Personal consumption increased by 0.2% from the previous month, lower than the 0.4% that had been expected and signals demand momentum from consumers continues to under-perform in the second quarter. Mitigating some of the pessimism was that personal incomes rose by 0.4% in May, right on estimates and positive for future consumption data. Along with the aforementioned numbers, the PCE data showed headline inflation rose to 1.8% on a y/o/y basis, while core ticked up to 1.5%; though most likely not actionable at this point by the Fed, the slow creep towards 2% should start to garner attention from markets if the trajectory is sustained. The DXY has managed to pick itself up from yesterday’s tumble, S&P futures are pivoting around UNCH, while USDCAD remains flat in the low-1.07s.
Looking ahead to what lies on the docket later in the session, household spending for the Japanese economy in the month of May will hit the wires as the overnight Asian session kicks off. Central bank watchers will be very interested as to how this report will play into the Bank of Japan’s decision making framework on monetary policy, especially considering expectations are optimistic that after some belt-tightening in April because of the tax increase, consumers returned to stores and once again opened their pocketbooks. The median forecast is for the m/o/m reading to come in with a 2.5% increase, while the contraction compared to the last twelve months eases to only a loss of 2.0%.  Should the numbers show a sluggish rebound in household spending, expect USDJPY to rise on Yen weakness as it increases the likelihood Kuroda and the BoJ would think about additional stimulus measures with the tax hike weighing down consumer demand more than forecast. The expectations of further monetary policy divergence between the two central banks should keep any Yen strength well corralled over the short term anyway, but any data points that raise concern additional asset purchases from the BoJ could be considered, watch for Yen bears to establish new positions.
Further reading:
inflation
EUR/USD June 26 – Stable as Unemployment Claims Eyed
