US GDP Recap: Traders See Through Stellar 3.2% Headline Growth to Questionable Details
Matt Weller, CFA, CMT April 26, 2019 1:56 PM
Overall, the BEA estimated that the US economy grew at a 3.2% annualized rate in Q1, well above expectations of 2.2% growth. While President Trump will no doubt extol the headline growth, the details are less impressive under the hood.
Late last week, we highlighted the potential for a stronger-than-anticipated GDP reading, and the initial headline certainly supported that view. Overall, the BEA estimated that the US economy grew at a 3.2% annualized rate in Q1, well above expectations of 2.2% growth. While President Trump will no doubt extol the headline growth, the details are less impressive under the hood. For one, the strong GDP reading was boosted by inventory growth (+0.65% to the headline), with inventories rising to their highest levels since 2015. In addition, external trade added substantially to the bottom line. Given the mean-reverting nature of inventories and the ongoing trade war with China, both of these supportive factors may reverse to become headwinds in the coming quarters.
Perhaps most importantly for the Federal Reserve, the accompanying inflation data came in lighter than anticipated: the GDP price index rose just 0.9% vs. 1.2% eyed, while the GDP deflator rose just 0.6%, well below the 1.3% reading anticipated. In other words, this is not the type of “strong” growth that will scare the Fed into raising interest rates any time soon. Fed Funds futures traders agree, with the CME’s Fedwatch tool showing the odds of a rate cut by year-end essentially unchanged from pre-release levels near 60%:
Source: CME FedWatch, FOREX.com
The US dollar initially spiked higher on the news, with the Dollar Index hitting a 23-month high by a single pip at 98.33 before pulling back. As we go to press, the indicator is trading back at 98.00, down slightly from pre-release levels. US stock index futures spiked on the news, with the S&P 500 and DJIA now pointing to flat opens. The biggest relative move we’ve seen is in Treasury yields, with the 2-year yield shedding a quick 3bps back to 2.29% and the benchmark 10-year tenor seeing a similar drop to 2.50%.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.