US GDP – Round 2

Consumer spending picked up pace by 0.4% in June, propelled by higher gasoline prices and increased purchases of nondurable goods. With consumer activity making up more than two-thirds of the US economy, could we see a boost in GDP figures?

Factory orders also posted a surprise uptick in June as higher demand for metals and construction machinery caused the total value of new orders received by manufacturers to grow by 0.4%. I’d say this was a pretty good improvement since economists were predicting factory orders to fall by 0.7%.

The US trade balance also gained for the second consecutive time when it printed only a $27 billion deficit – less than the $28.4 billion deficit initially expected. The decrease was primarily caused by stronger demand for US goods, as exports gained 2%.

With all the recent developments, we have seen some optimism around the markets. This past weekend, we saw bankers meet at Jackson Hole, most of them suggesting that a rebound in the economy was under way (well, that’s what the headline of the New York Times read). The biggest statement came from Ben Bernanke, who proclaimed, “We saved the world from disaster.” Pretty big words but fine, I’ll give the US Fed some credit – they were in fact, the first to act.

Yes, the government did its part, implementing quantitative easing measures and its Cash-for-Clunkers programs. As I pointed out above, these programs seem to be working as the economy seems to be gathering some steam. Still, I remain cautious over the whole economic situation. Note that the Fed extended the end of their quantitative easing measures from September to October. Here, we see the Fed showing some optimism (and somewhat bragging about it at Jackson Hole), but still remaining cautious through their actions. Yes, we have been seeing signs of life as of late but are these signs real? Are these improvements here to stay?

Just a few weeks ago, the US advanced GDP landed at -1%, beating the forecast of a 1.3% downturn in economic growth. The inflation-adjusted preliminary GDP is due on Thursday and this could cause another ruckus in the currency markets…

If the preliminary GDP prints better than the expected -1.3%, then you know the usual routine when the US economic data whistles an upbeat tune… Market players take this as a sign that things are looking brighter for the global economy. As a result, they muster enough confidence to pursue riskier assets and dump the safe-haven USD along the way. Do you remember the reaction of the EURUSD when the US advanced GDP beat the consensus? A 200-pip leap of joy!

On the other hand, if the preliminary GDP sees a downward revision from -1% to -1.3%, traders could panic and run to the safe arms of the USD and JPY. You know the drill… a drop in equities, a slump in commodity prices, and a sell-off in higher-yielding currencies. However, a closer look at the latest inter-market reactions shows that the market did not quite follow the script…

We saw some strange things happen in the markets on Monday as price action kind of deviated from the norm. The US Dow Jones Index got a lift from the higher oil prices, which jumped to $ 75/barrel for the first time this year after falling to a low of $35/barrel just this March. The broader market, however, closed lower. Gold fell and the USD gained against the EUR and the GBP. Still, the comdolls, fueled by the rise in oil prices, managed to edge the USD despite the drop in gold prices.

During periods of uncertainty, demand for safer assets such as treasuries and bonds usually go up, thus causing their prices to increase. Prices of equities and commodities usually follow suit, indicating that the economy has transitioned from stabilization to growth. During the first quarter of this year, both oil and gold sunk with the global equities market due to deflation fears. Recently, however, we are seeing a rise in both oil and gold because of increased optimism in the global capitals markets.

What does this have to do with the currency market? Currencies like the CAD, AUD, and NZD generally move alongside commodities. Risk appetite in the global capitals markets, which lifts the equities and the commodities markets, also drives the other currencies like the GBP and the EUR higher. Meanwhile, risk aversion attracts investors to so-called safe-havens such as bonds, treasuries, the USD and the JPY.

Yet… Monday’s action left these inter-market relationships in question. Was yesterday’s overall price movement just an oddity? Perhaps the results of the US Preliminary may prove to be a catalyst that will alter market correlations. Stayed tuned my forex friends!