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Markets

Asian markets mostly started the day in risk-off modus after a disappointing outlook from tech bellwether Meta at its earnings report yesterday after the close of US markets. This also spilled over to European equities this morning. The risk-off again didn’t trigger any real safe haven bid for core bond markets. Declines in EMU yields were negligeable given recent rise. In line with recent other data evidence, German consumer confidence (GFK) also improved in April, (-24.2 from -27.3) supporting the idea of a services-driven recovery. US yields drifted cautiously higher going into the release of the first estimate of Q1 US GDP growth. The outcome was a bit confusing. US Q1 growth slowed 1.6% Q/Qa from 3.4% in Q4 2023 and 2.5% expected. However, domestic spending remained solid with personal consumption still growing 2.5% on solid demand for services (consumption growth on goods was slightly negative). Gross private investment (3.2%) and government consumption (1.2%) also added to growth. The downward surprise was mainly due to a negative contribution from inventories (-0.37% subtraction) and net exports (-0.86% subtraction). At least as important for markets as growth, price indicators again surprised to the upside. The global price index rose 3.1% from 1.6%. The core PCE deflator jumped from 2.0% to 3.7%! Yields briefly declined upon the release, but second reading soon made market realize that solid domestic demand and stubbornly high price indices won’t provide the Fed any comfort to start easing policy anytime soon. US yields currently add between 8 bps (2-y) and 6.0 bps (30-y). A low jobless claims figure (207k) only pointed in the same direction. The 2-y yield is topping the 5.0% mark. Markets are further scaling back expectations for two Fed rate cuts by the end of the year. A first 25 bps step is pushed back to November and a <50% chance is seen for an additional step in December. German yields follow the rise in the US at a distance, adding 3-5 bps across the curve and setting new YtD top levels. Higher (real) yields continue to put pressure on equity markets. The decline in EuroStoxx50 accelerated after the GDP release (-1.50%) US equities opened with losses of up to 2.0% (Nasdaq). The dollar gains, but rather modestly given the rise in US yields and the risk-off sentiment. DXY reversed an earlier intraday declined to again trade just below 106. EUR/USD slipped back below the 1.07 big figure (1.0680). USD/JPY is setting another multi-year top at 155.5 going into tomorrow’s BoJ policy decision. Sterling again slightly outperforms the euro despite CBI data showing a poor April retail sales performance. EUR/GBP is drifting further below the 0.86 (previous) support area (0.8575).

News & Views

The Turkish central bank (CBRT) kept its policy rate unchanged at 50% today after an unexpected 500 bps rate hike in March. The policy statement remains hawkish with a readiness to tighten further in case of a significant and persistent deterioration in inflation (expectations). For the time being though, the onus is watching how previous tightening with a lagged effect impacts credit conditions and domestic demand. The underlying trend in Turkish inflation was higher than expected in March with resilient domestic demand, the high level of and stickiness in services inflation, inflation expectations, pricing behavior, geopolitical risks and food prices all posing inflationary threats. The CBRT eventually hopes to bring inflation back to the 5% target over the medium term via monetary and financial conditions that bring around a moderation in domestic demand, a real appreciation of the Turkish lira and an improvement in inflation expectations. They hope to see green shoots in the disinflation process in the second half of this year. TRY isn’t impressed yet and holds near all-time lows at EUR/TRY 34.87.

French President Macron in a speech at the Sorbonne University in Paris called for an overhaul of EMU monetary policy. He suggested that inflation cannot be the sole target of the ECB and that there is need for a growth or decarbonization target as well. Macron blamed China and the US for over-subsidizing their companies and wants to double the EU’s budgetary capacity to ramp up public investment but also for defense. Macron argues that the EU can no longer rely on the US for its security. In order to achieve this, the French president wants to build a capital markets union in 12 months!

Graphs

US 2-y yield returns north of 5% as markets see ever lower probability of Fed rate cuts this year.

Nasdaq: Equities feeling headwinds from higher (real) yields

EUR/USD. Dollar rebounds (cautiously) as US economy shows solid domestic demand and sticky prices.

EUR/TRY: CBRT ‘tightening bias’ not enough to support the lira as EM currencies are under pressure globally.

Summary

Real GDP grew at only a 1.6% annualized pace in Q1, held back by trade and inventories. Consumer spending in the service sector is not slowing, in fact, it is ramping up at a rate seldom seen in the past 20 years. That is problematic as core PCE prices are picking up again in defiance of higher rates.

Not the Droids You're Looking For

It is tempting to see today's miss in GDP as a welcome indication that curiously strong growth is at last giving way to the inevitable gravity of higher rates and thus the first bit of data needed to warrant eventual rate cuts by the Federal Reserve. Despite the fact that headline growth came in almost a full percentage point below expectations, we see little in today's report that will warrant much legitimate justification for a softer monetary policy stance.

After an unsettling headline miss, the picture that emerges from the details in today's GDP report is actually more of the same in terms of the factors that are standing in the way of a lower rate environment.

Consumers are still spending, they are just prioritizing activities in the service sector. Spending on non-durable goods stalled in the quarter while outlays on big-ticket durable goods items contracted at a 1.2% annualized rate. That was not nearly enough to offset the much larger services category, where consumers spared no expense in the first quarter. Like a relief pitcher in the late innings, services spending came in throwing heat in the first quarter with a blistering 4.0% annualized growth rate—the fastest surge in consumer services spending since the stimulus-fueled binge in 2021. Excluding 2020 & 2021, services has only come in above 4.0% three times in the last two decades (once in 2014 and twice in 2004). Higher rates are intended to cool consumer demand; the trouble for the Fed is: it's not working.

The core PCE deflator rose at a 3.7% annualized rate in Q1, a notable acceleration after a sharp slowing the prior two quarters (chart). This data implies a strong 0.4% increase in March core PCE, set to be released tomorrow. Services excluding energy and housing rose at a 5.1% annualized rate in Q1, the fastest in a year.

While higher rates may be restraining spending on goods that may be exposed to higher borrowing costs, households keep pulling out all the stops to keep spending. Real disposable income rose at a slower rate in the first quarter, but remained positive and households are saving less of that income on a monthly basis. The personal saving rate slipped to 3.6% during the quarter, which marks the lowest rate at which households have saved since the end of 2022.

So why the long face? Why was the headline number so weak? Partly because there was a significant drag from trade. Net exports exerted a drag of 0.86 percentage points on the headline number. Without that drag, the headline number would have come in precisely in line with consensus estimates. While goods spending is weak, businesses are playing it smart by not importing too much in the way of goods. Goods imports subtracted about three quarters of a percent from growth in the first quarter which swamped only tepid growth in exports during the same period.

Businesses also look to be managing inventory levels fairly well. Real private inventories rose by $35.4 billion in Q1, but since they rose at a slower pace than in the fourth quarter of last year, they again resulted in a drag on headline growth, subtracting 0.35 percentage points from GDP last quarter.

In looking through some of these volatile factors, underlying growth remained quite solid in the first quarter. Real final sales to domestic private purchasers, which strips away net exports, inventories and government investment and gets at the underlying trend in domestic demand, rose at a 3.1% annualized rate during the quarter. The last three quarterly prints for this measure have all come in at 3.0% or higher, signaling healthy and stable growth. Don't underestimate this economy.

• BTCUSD regains ground in the halving aftermath
• But the price gets rejected at the 50-day SMA
• Momentum indicators are tilted to the downside

BTCUSD (Bitcoin) had been in a slow but steady recovery after the completion of the halving event on April 19, erasing a significant part of its recent slump. However, the rebound appears to be on pause for now following the price’s inability to conquer the 50-day simple moving average (SMA).Should Bitcoin reverse lower, the March support of 62,500 might curb initial downside attempts. Sliding beneath that floor, the price could challenge 60,760 ahead of 59,313, both of which have provided support during March. A violation of the latter may set the stage for the February resistance zone of 52,850.

On the flipside, if buying pressures re-emerge, the price might revisit its recent resistance of 67,270, which overlaps with the 50-day SMA. Conquering that zone, the bulls might attack 69,000, a level that acted both as support and resistance in recent months. A break above that region could pave the way for the March resistance of 71,750.

In brief, BTCUSD has been on the retreat after its recent rejection at the 50-day SMA. Can the bulls strike back?

.Daily Pivots: (S1) 1.0680; (P) 1.0697; (R1) 1.0716; More...

EUR/USD retreated after brief breach of 1.0723 support turned resistance and intraday bias remains neutral. Break of 1.0677 support will indicate rejection by 1.0723, and turn bias back to the downside. EUR/USD should then resume larger down trend through 1.0601 low. Nevertheless, firm break of 1.0723 will bring stronger rebound to 55 D EMA (now at 1.0786) instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Current fall from 1.1138 is seen as the third leg. While deeper decline is would be seen to 1.0447 and possibly below, Strong support should emerge from 61.8% retracement of 0.9534 to 1.1274 at 1.0199 to complete the correction.

Daily Pivots: (S1) 0.9121; (P) 0.9138; (R1) 0.9167; More....

Intraday bias in USD/CHF is back on the upside with breach of 0.9151 resistance. Current rally from 0.8332 should target 0.9243 key resistance next. On the downside, though, below 0.9085 minor support will turn intraday bias neutral again.

In the bigger picture, price actions from 0.8332 medium term bottom as tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Further rise would be seen as long as 0.8728 support holds. But upside should be limited by 0.9243 resistance, at least on first attempt. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish.

Daily Pivots: (S1) 154.91; (P) 155.15; (R1) 155.58; More...

Intraday bias in USD/JPY remains on the upside at this point. Sustained trading above 155.20 fibonacci level will pave the way 100% projection of 140.25 to 150.87 from 146.47 at 157.09. Considering bearish divergence condition in 4H MACD, break of 154.77 resistance turned support will turn bias back to the downside for deeper pull back to 153.58 support first.

In the bigger picture, current rise from 140.25 is seen as the third leg of the up trend from 127.20 (2023 low). Next target is 61.8% projection of 127.20 to 151.89 from 140.25 at 155.20. Firm there will target 100% projection of 140.25 to 150.87 from 146.47 at 157.09., Outlook will remain bullish as long as 150.87 resistance turned support holds, even in case of deep pullback.

Real GDP expanded by 1.6% quarter-over-quarter (q/q, annualized) in the first quarter of 2024 – below the consensus forecast of 2.5%.

Consumer spending expanded by 2.5% – a modest deceleration from last quarter's 3.3% gain. Service spending (+4.0%) accounted for all of last quarter's gain, while spending on goods (-0.4%) was flat.

Non-residential business investment expanded by 2.9%, with gains seen across equipment (+2.1%) and intellectual property products (+5.4%). Residential investment (13.9%) rose by its fastest pace in over three years, alongside a sharp rebound in new & existing home sales.

Government consumption & gross investment rose 1.2%, with state & local spending up 2.0% while federal spending (-0.2%) was flat.

Next exports shaved 0.9 percentage points (pp) from growth, as a modest uptick in exports (+0.9%) was eclipsed by a sharp gain in imports (+7.2%).

Inventory investment was also a net drag on growth, shaving 0.4 pp from GDP.

Core PCE inflation rose 3.7% (q/q, annualized) – a sharp acceleration from the 2% gain seen through H2-2023.

Key Implications

The advance estimate of first quarter GDP showed the U.S. economy having downshifted relative to the strong pace of growth averaged through the second half of last year. That said, net exports and inventory investment were a sizeable drag on Q1 growth and helped to mask some of the underlying strength. Importantly, domestic demand (i.e., the sum of consumption, fixed investment, and government expenditures) expanded by a still strong 2.8% and showed only a modest deceleration from last quarter's gain of 3.6%.

Consumer resilience is likely to remain a key driver supporting economic growth over the near-term. Job gains remain plentiful and have shown little indication of slowing. This is helping to support aggregate gains in household income and providing a sustained tailwind to consumer spending. Tomorrow's release of the March personal income and spending data will give a better sense of the monthly spend pattern in Q1, but for now, it looks like spending momentum has carried over into Q2. Our current tracking has real GDP growth holding steady in the 1.5%-2% range in the second quarter.

Daily Pivots: (S1) 1.2368; (P) 1.2414; (R1) 1.2495; More...

Intraday bias in GBP/USD remains neutral for the moment. Near term outlook stays bearish as long as 1.2538 support turned resistance holds. Break of 1.2421 minor support will argue that rebound from 1.2298 has completed and bring retest of this low. However, decisive break of 1.2538 will bring stronger rally to 55 D EMA (now at 1.2585) instead.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Fall from 1.2892 is seen as the third leg. Deeper decline would be seen to 1.2036 support and possibly below. But strong support should emerge from 61.8% retracement of 1.0351 to 1.2452 at 1.1417 to complete the correction.

Risk sentiment took a sharp downturn following the release of US Q1 GDP data, which revealed weaker-than-expected economic growth alongside an acceleration in both headline and core PCE price indexes. This combination suggests that the US economy may be caught in a challenging cycle where high interest rates are dampening economic activity without effectively curbing inflationary pressures. In response, DOW futures plummeted by over -300 pts at the time of writing, signaling a steep market open, while 10-year Treasury yield is making moves to break 4.7% mark.

In the currency markets, Dollar is attempting a rebound driven by the shift in risk sentiment, though it remains uncertain whether it can fully offset this week's losses. Currently, Japanese Yen remains the weakest performer for the week, followed by Swiss Franc. Australian Dollar continues to hold the lead as the strongest, with British Pound and New Zealand Dollar also showing resilience. Euro and Canadian Dollar are positioned in the middle. But these standings could shift dramatically if the risk-off mood intensifies throughout the remainder of the week.

Technically, EUR/USD failed to sustain above 1.0723 support turned resistance despite breaching it briefly. Immediate focus is now on 1.0677 minor support. Firm break there will argue that recovery from 1.0601 has completed as a correction, and retain near term bearish next. EUR/USD might then be resume to resume the fall from 1.0980 through 1.0601.

In Europe, at the time of writing, FTSE is up 0.41%. DAX is down -0.93%. CAC is down -1.24%. UK 10-year yield is up 0.0399 at 4.374. Germany 10-year yield is up 0.0236 at 2.616. Earlier in Asia, Nikkei fell -2.16%. Hong Kong HSI rose 0.48%. China Shanghai SSE rose 0.27%. Singapore Strait Times fell -0.16%. Japan 10-year JGB yield rose 0.0070 to 0.898.

US GDP expands 1.6% annualized in Q1, below expectations

US real GDP grew at an annualized rate of 1.6% in Q1, missing expectation of 2.1%, sharply lower than Q4's 3.4%.

Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected decelerations in consumer spending, exports, and state and local government spending and a downturn in federal government spending. These movements were partly offset by an acceleration in residential fixed investment. Imports accelerated.

Price index for gross domestic purchases increased 3.1% in Q1, compared with an increase of 1.9% in the Q4. Personal consumption expenditures (PCE) price index increased 3.4%, compared with an increase of 1.8%. Excluding food and energy prices, PCE price index increased 3.7%, compared with an increase of 2.0%.

ECB's Schnabel identifies services inflation as primary concern

ECB Executive Board Member Isabel Schnabel acknowledged that the consensus that the path to disinflation is proving to be "quite bumpy," especially as the process is in its "last mile". The "biggest concern" is the persistent inflation within the services sector, which remains stubbornly high.

Schnabel emphasized the importance of closely monitoring unit labor costs. She noted at a conference today, "One aspect that we are looking at very vigilantly is the development of unit labor cost."

"Wage growth remains relatively strong but it seems to be gradually easing in line with what we have in our projections," she added.

However, Schnabel expressed particular concern over another crucial economic indicator: "The more concerning part is productivity growth," she remarked, as Eurozone has been experiencing negative productivity growth for several quarters.

Germany's Gfk consumer sentiment rises to -24.2, an extremely low two-year high

German Gfk Consumer Sentiment for May rose from -27.3 to -24.2, above expectation of -25.5. This marks the highest level in two years, although it remains significantly low by historical standards.

In April, economic expectations rose from -3.1 to 0.7. Income expectations rose from -1.5 to 10.7. Willingness to buy rose from -15.3 to -12.6. Willingness to save rose from 12.4 to 14.9.

Rolf Bürkl, consumer expert at NIM, attributed the stronger uplift in consumer sentiment mainly to the "noticeable increase in income expectations." He elaborated that these expectations are closely tied to actual developments in real income, buoyed by rising wages and salaries alongside recent dip in inflation rates. This combination has laid a solid foundation for increasing purchasing power among households.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2368; (P) 1.2414; (R1) 1.2495; More...

Intraday bias in GBP/USD remains neutral for the moment. Near term outlook stays bearish as long as 1.2538 support turned resistance holds. Break of 1.2421 minor support will argue that rebound from 1.2298 has completed and bring retest of this low. However, decisive break of 1.2538 will bring stronger rally to 55 D EMA (now at 1.2585) instead.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Fall from 1.2892 is seen as the third leg. Deeper decline would be seen to 1.2036 support and possibly below. But strong support should emerge from 61.8% retracement of 1.0351 to 1.2452 at 1.1417 to complete the correction.

Economic Indicators Update

US real GDP grew at an annualized rate of 1.6% in Q1, missing expectation of 2.1%, sharply lower than Q4's 3.4%.

Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected decelerations in consumer spending, exports, and state and local government spending and a downturn in federal government spending. These movements were partly offset by an acceleration in residential fixed investment. Imports accelerated.

Price index for gross domestic purchases increased 3.1% in Q1, compared with an increase of 1.9% in the Q4. Personal consumption expenditures (PCE) price index increased 3.4%, compared with an increase of 1.8%. Excluding food and energy prices, PCE price index increased 3.7%, compared with an increase of 2.0%.

Full US GDP release here.