Markets Today: US ‘economic turnaround’ brought forward

The US has boasted about the economic turnaround evidenced by Friday’s GDP figures.

By Rodrigo Catril

Today’s podcast:

https://soundcloud.com/user-291029717/us-economic-turnaround-brought-forward

Overview: You ain’t seen nothing yet

US 2Q GDP at 4.1% vs 4.2% expected. Highest since 2014
Sense of GDP payback sees the UST curve bull flatten and drags the USD lower
Trump and Co. suggests US well on the path of sustained higher growth
AUD the winner on Friday, but closes lower for a third consecutive week
US equities down across the board with tech shares again leading the decline
European equities close up on Friday and for the week
Australia’s Labour party the big winner on Super Saturday’s by-elections
Week ahead: Big week globally, FOMC and US Payrolls; AU retail sales, building approvals, trade and credit; CH PMIs; BoE and BoJ meetings; EZ CPI and GDP

US Q2 GDP print was the big data event on Friday night and the numbers came in just below expectations at 4.1% (4.2% exp.) with Q1 figures revised upwards. Consumers and exports led the gains during the quarter, but with soybeans leading the rise in exports (+9.3%) and tax cuts behind the consumer, the sense of pay back in Q3 took some of the gloss off the impressive numbers. President Trump was quick to hail the numbers as a great outcome from his policies and along with his economic advisers they have suggested the US economy is well on the path for years of sustained higher growth. Bachman Turner Overdrive classic “You Ain’t Seen Nothing Yet” the perfect song to sum up Trump and Co. message where 3% sustained growth is the number that has been suggested against the Fed longer run growth expectation of 1.8%.

The GDP figures were met with a bull flattening on the UST curve as the 10y rate dropped 3bps to 2.95%, before closing the session at 2.954%. After threatening to climb above 95 ahead of the data release, the DXY (USD index) shadowed the move lower in 10y UST yields and ended the day at 94.68. The move lower in the USD helped the AUD climb to an overnight high of 74.11, before settling just below the figure, up 0.31%, and the best performing G10 currency for the day. European equities closed higher and tech shares led the decline in the US, with Twitter slumping an eye watering 21%.

Tight ranges have been the theme for most currency pairs in the past week, although it is interesting to note that speculative positioning is starting to look stretched in many pairs, including the AUD where the market has increased its bearish bet, now the shortest since September 2015. The new week is busy with important data release and events, so on paper the potential is there for at least some of these ranges to be challenged.

Currencies

Although the AUD was the best performing G10 currency on Friday, it still closed lower on the week and it recorded its third consecutive lower weekly close. Not a good look from a technical perspective. JPY was the other outperformer on Friday and also one of the three currencies to outperform the USD on the week. Speculation over a potential BoJ policy tweak supported the yen in the past week, notably however speculators increased their short bet in JPY. CAD has been supported by positive NAFTA sound bites and a dovish ECB weighted on the Euro in spite of a good Juncker-Trump meeting.

Equities

European equities closed higher on Friday and tech shares weighted on US equities with Twitter following Facebook’s awful performance, falling 21% on Friday. The NASDAQ was the big loser on the week, down 1.06% while European equities were the big winners reflecting optimism following a truce in trade tensions between Europe and the US.

Bonds

Early in the week 10y UST yields broke the upper band of their tight 2.80% to 2.89% range held since late June and managed to close the week at 2.96%, after trading to an overnight high of 2.9857%. In general UST yields closed slightly lower on Friday, but all major tenors rose on the week. 10y Core global yields lagged the move in 10y UST yields, but still closed the week higher. Ahead of the FOMC meeting Thursday morning, pricing expectations for a September hike have held above 90%.

Commodities

It was a quiet Friday for commodities with the 1.3% decline in WTI oil and 0.6% decline in copper the highlights. On the week aluminium was the big winner up 2.07% leading the gains within metals, copper was up 1.67% and again WTI the big loser down 2.51%.

Economics

US 2Q GDP grew at a 4.1% vs 4.2% expected. Q1 growth was revised up to 2.2% from 2.0%, so the average for the first half was a robust 3.2%. Consumers led the way by adding 2.69% to the headline number while net export added 1.1%. Soybean exports ahead of China tariffs in July were a big contributor for the export increase (exports surged 9.3%), suggesting some payback is likely in Q3 while the fading impact from tax cuts also suggest less support is likely from the consumer in Q3. The headline number was depressed by a surprising outright fall in inventories, down $28bn, subtracting a hefty 1% from growth.
Core PCE was +2.0% vs +2.2% expected and prior core PCE of 2.3%
US University of Michigan consumer sentiment July’s final reading prints a tad higher 97.9 vs 97.1 expected. The 1y and 5-10 year inflation expectations were unchanged at 2.9% and 2.4% respectively.
Baker Hughes US oil rig count 861 vs 858 prior
Speaking about the strong US GDP numbers, President Trump says “Once again, we are the economic envy of the entire world,” and adds “As the trade deals come in, one by one, we’re going to go a lot higher than these numbers.”. And speaking on Sunday Treasury Secretary said the US economy “well on the path” for four or five years of sustained annual growth of %.
Australia’s Labor party claimed four out of four victories in the Super Saturday by-elections. The outcome has helped Bill Shorten cement his position as Labor Leader and it has also raised doubts over the Coalition’s public support, particularly in Queensland, as well as its policies approval ahead of the upcoming Federal elections.

Coming up

Highlights of the week include the FOMC meeting, ISMs as well as China’s PMIs which will be important for the AUD. Australia’s retail sales on Friday is the domestic data release to watch, after two stronger-than-expected prints in April and May, NAB expect a soft +0.1% m/m print in June, so if that is right the AUD is unlikely to get much support from the domestic side. Meanwhile the AUD exposure to China and CNY in particular is likely to dominate. CNY closed at 6.8133, its highest level since June 2017, so there is no sign yet of CNY stabilisation and further weakness will remain a thorn in the side for the AUD. The BoJ policy announcement will be important for JPY on Tuesday and BoE for GBP on Thursday.
Tonight Germany get its inflation figures for July (core seen unchanged at 2.1%) ahead of the Eurozone numbers tomorrow and the US get pending home sales figures for June.