Negative revisions to US growth weighs on dollar risk assets
30/Jun/2014 • Currency Updates•
A much worse than expected revision to US GDP growth in the first quarter weighted on equities, credit and the dollar across the board. However, the moves were very subdued; equities are still within a good day’s rally of setting new record highs, and major currencies continue to trade within extremely tight ranges, with weekly moves of less than 1% in sterling, the euro and the dollar. Focus now shifts to next week’s packed calendar, where we will see the inflation numbers out of the Eurozone, ECB and Bank of England meetings, and the all-important payroll number out of the US.
Policy makers dominated financial headlines in the UK last week. The financial policy committee (FPC) of the Bank of England communicated the BoE’s displeasure with rising house prices by announcing stricter affordability tests on mortgages. Further, it placed a 15% limit on the proportion of new mortgage loans that lenders can make above the threshold of 4.5 times borrower income. Neither of these measures will have a dramatic immediate impact on the mortgage market; however, the Bank of England has made it clear that it regards house prices as one of the key variables it is tasked with managing. Should the housing market fail to cool, there is little doubt that further measures will be announced until it does.
In parallel, four members of the MPC appeared before the Treasury Select Committee. They strongly suggested that hikes are most likely coming between the last quarter of this year and the first of the next. We maintain our view of a 25% chance of a 4Q hike, a 50% chance of a hike in Q1 of 2105, and a 25% chance that the first hike is delayed beyond that.
The PMI indicators of business sentiment continue to soften. The composite index fell to 52.8. This still leaves it well above the 50 level that normally marks the line between contraction and expansion, but we must note that a gap had developed over the past few quarters between relatively healthy PMI numbers and anaemic GDP growth. A level below 53 in the composite index therefore is probably consistent with economic growth under 1%, nowhere near enough to make a dent in the Eurozone persistent problems of unemployment and under-utilisation of productive capacity. We do not expect major news out of the next two meetings of the ECB, but we think that economic weakness will force the ECB to announce further easing measures as early as the September meeting.
Growth in the first quarter of 2014 was revised down yet again to a miserable -2.9% contraction, from a previously reported -1.0%. The bulk of the revision was caused by a massive decline in health care expenditures. With the rollout of the Obamacare health insurance scheme, the government had estimated initially that health care expenditure had risen by 9.1% saar. Instead, there was an actual contraction of -1.4%. As a consequence, real consumer spending was revised from 3.1% to just 1%. We are keeping our forecast of 3.5% GDP growth in the second quarter, as we expect health care spending to bounce back. However, in view of this revision the payroll report out on Thursday (Friday is a holiday in the US) takes on added importance. We will have a special report out within minutes of the release. Stay tuned.