US GDP as expected, but the components are good (Afternoon analysis 27.07.2018)

27.07.2018 15:46|Bartosz Grejner

GDP growth pace in the USA is below expectations, but the components point to a solid economic growth. The zloty gains slightly as the dollar weakens, but the situation may turn around in the following hours.

Stocks weakened GDP

Today the market awaited for data on the growth pace of the US economy in the Q2. It was known that the reading would be relatively high - the market consensus indicated that the GDP would grow by 4.2% per year. However, it has been speculated that this could be even higher as a result of the statements made by President Trump, who said that the data would be 'excellent'. Two months ago, when he used a similar statement in the context of labour market data, it turned out to be better than market estimates.

However, data from the Bureau of Economic Analysis (BEA) showed that the US economy grew by 4.1% in the Q2 (quarter-to-quarter, but the data was annualised). The market could count on more, but looking at the GDP components, they were very good.

The consumption contribution (2.69 percentage points) was the highest since Q3 of 2014, mainly due to strong demand for services. Net export also recorded a positive impact (1.06 percentage points) on the GDP, which contributed the most since Q4 of 2013. However, the overall GDP growth pace was subdued by the negative contribution of stocks, which was the highest in just over 4 years (-1.00 percentage point).

This is, however, the first reading of GDP, and BEA will make two more readings. More accurate stock measurements may indicate a reduction in such a large negative impact, and ultimately GDP growth may be closer to 4.5%.

The dollar appreciated gradually even before the data appeared. The publication itself caused a slight weakening of it. Investors could be disappointed with GDP growth, thus the initial reaction was subdued. The most important GDP components indicate that the US economy is growing at a very rapid pace, which should support the US currency in the long run.

A stronger reaction in the dollar can be observed in the evening when the US investors will be more active. If the dollar strengthens, part of the profits may be returned by the zloty. The EUR/PLN exchange rate was around 4.281 at 3.00 p.m., slightly stronger than yesterday, as it was the case with other basic currencies.

The calendar of significant events in the coming hours is practically empty, therefore the zloty's quotations will depend to a great extent on the main currency pair's behaviour and the main stock indexes in the USA. The data published today may rather suggest the dollar strengthening (the EUR/USD pair depreciation) and rising stock exchanges. The first factor may exert pressure on the zloty, while the second one may slightly reduce it. As a result, in the case of such a scenario, we may see a slight depreciation of the zloty in relation to the current levels.

Next week's preview

The next week's calendar has a relatively large number of events, which may increase the volatility on the currency market. On Monday, the preliminary data on consumer inflation in Germany in July will be published, which in turn may give some guidance on the inflation rate in the entire eurozone. This will be published the next day, and if the core inflation index is again below the 1.0% yearly limit (the consensus is just 1.0%), a weakening of the euro may occur.

On Tuesday, data on consumer inflation in Poland for July will be published. Recently, we have had a series of very good data from the Polish economy (e.g. industrial production, retail sales) and another positive reading, which would exceed the market consensus by 2.0% year-on-year, could support the zloty. On the other hand, it should be remembered that the zloty's quotations are currently more dependent on external factors.

June's PCE inflation in the US will also be published on the same day. Although this data is for the previous month, it is the type of inflation that the Federal Reserve takes into account in its projections. In May, it rose to 2.0% per year, the highest level in 6 years. The consensus assumes that this level will be maintained, but it seems that deviation from the consensus by 0.1 percentage points may increase the fluctuation range in the dollar.

In the evening, a statement will be published after the monetary committee of the Federal Reserve meeting. At this meeting, interest rates are unlikely to be changed. On the other hand, the dollar could be strengthened by the relatively hawkish tone of the statement, taking into account the good data coming from the US economy.

Thursday will be important for the pound. The Bank of England may raise the main interest rate from 0.5% to 0.75% after its meeting. As expected by the market, UK central bank members' expectations of inflation and future interest rates may be important. In a context of high uncertainty over Brexit issue and relatively weak economic data, a positive tone is hard to be expected. In a scenario of leaving interest rates unchanged, the pound could come under supply pressure.

As on the first Friday of every month, the US Department of Labor will publish a labour market report. The market will focus mainly on July's data on the average hourly wage. Its annual growth above 2.7% (current consensus and June's level) may suggest greater wage pressure on inflation, which may increase the probability of a more rapid monetary tightening. Ultimately, the dollar could gain a lot in such a case, which might not be so good for the zloty.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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