Cool Video: Q1 US GDP Optics may Mark Near-Term Peak in Divergence Theme

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Marc Chandler
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I joined Tom Keene and Francine Lacqua to talk about US GDP with David Riley from BlueBay Asset Management. Here is a link to a 2.5-minute clip.

The initial estimate of Q1 US growth was well more than nearly anyone expected. The details were underwhelming as the consumption was halved and the GDP deflator was halved. Final private domestic sales, which strips away inventories, trade, and government spending rose 1.3%, the least more than five years.

Still, what is most striking is how it compares in relative terms. The Japanese economy appears to have contracted in Q1. The eurozone will report its initial estimate of Q1 growth a few hours before the FOMC meeting concludes on Wednesday. The median forecast in the Bloomberg survey anticipates a 0.3% expansion in Q1 after a 0.2% print in Q4 18. The survey data has been poor,, including today’s industry and consumer EC surveys. The much-followed, composite PMI averaged 51.5 in Q1 19 after 52.3 average in Q4 18. However, real sector data, like retail sales and industrial output have been stronger than seen in the last months of 2018. The eurozone will be lucky to match the Q4 year-over-year pace of 1.1%.

Yet, like the US GDP overstates the case, EMU may not be as weak as some data appears and disinflation forces not quite as strong. The service sectors in EMU members, including and especially Germany is notable. It hints of headwinds in industry and exports. The combination of the decline in the euro and the rise in oil prices will feed into higher measures of inflation going forward.

The dollar, I have suggested, has been driven by the US economic and monetary divergence. However, the greenback’s inability to make much headway on the back of the GDP surprise warns that the divergence meme has gone as far as it can in the near-term, and this means that dollar is likely entering a consolidative phase. Given market positioning, the consolidation probably means a softer greenback. In turn, this could set up a test on the areas that the dollar appeared to break out of last week. The Australian dollar and yen have moved back into the previous trading ranges. If the euro cannot retake $1.12 and sterling cannot get above $1.30, Momentum traders would likely see it as a failure and press them lower. The next important targets are $1.10 for the euro and the $1.2775 area for sterling.