Morning Commentary: U.S. Q1 GDP – What Lies Below the Surface

Foreign Exchange - Morning Commentary

U.S. Q1 GDP – What Lies Below the Surface

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Investors and traders have a way of parsing through economic data very quickly and focusing on what they believe to be the true underlying fundamentals. Today’s U.S. Q1 GDP is a classic case where market participants ignored the upbeat and positive headline data and focused on the underlying components.
U.S. Q1 GDP came in much stronger than expected at a 3.2% annualized rate versus expectations for 2.5% annualized rate.  This was the first time that Q1 GDP topped 3.0% since 2013. Expectation beating GDP data normally would have pushed U.S. interest rates and the U.S. dollar higher but that did not happen this morning.
Instead, the market focused on two key components of GDP—personal consumption and inflation.  Personal consumption, which makes up nearly 70% of the economy, rose only 1.2% after gaining 2.5% in Q4. Inflation, measured by the GDP Price Index, came in below expectations, rising by 0.9% against expectations for a gain of 1.2%.  This follows a rise of 1.7% in Q4. These two misses on consumption and inflation have caused U.S. interest rates to fall with 2-year yields down by a hefty 5 bps.
U.S. interest rates and equities have been on divergent paths for quite a while now. Investors and traders in the interest rate sector continue to focus, like a laser, on inflation data.  As long as inflation remains benign, interest rates will remain accommodative. Interest rates remaining accommodative should continue to provide fuel for a rising equity market. Look for the U.S. dollar to continue to be caught in the crossfire of rising equities, lower U.S. interest rates, and continued dovish responses from other G7 central banks.
  • The Bank of Russia kept interest rates unchanged at 7.75% for the third straight meeting. Inflation appears to have peaked but annual inflation remains above the four percent target.
  • Oil prices have now fallen for three straight days but remain elevated after surging in late December. The last time oil prices fell for three straight days was back in early December.
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