The American economy expanded at a 2.3-percent annualized pace during the first three months of 2018 – somewhat weaker than in the prior three quarters, but much better than markets had forecast. After serial first-quarter disappointments over the last decade, economists had expected growth to fall toward 2-percent.
Consumer spending rose 1.1 percent, dropping after a 4-percent gain in the fourth quarter – but a big increase in business investment helped tilt the balance to the upside. Even as residential housing growth flattened, spending on new equipment surged to 6.1 percent and investment in structures more than doubled to 12.3 percent – illustrating a positive rotation in growth.
Core personal consumption expenditure (the Federal Reserve’s preferred inflation measure) accelerated to an annualized 1.8 percent, supporting the case for continued monetary tightening in the world’s largest economy. Odds on a June rate hike have spiked up toward the 92-percent level – as close to certainty as markets can get, given the time horizon.
In stark contrast, countries on the other side of the pond suffered from seasonal affective disorder (SAD) in the first quarter – as evidenced in disappointing growth prints from France and the United Kingdom earlier this morning.
The euro is coming under renewed selling pressure after the French economy expanded by 0.3 percent in the first three months of the year – discouraging markets that had expected a smaller drop from the 0.7 growth rate recorded in the prior quarter. With sentiment quickly shifting on when the European Central Bank will end its asset purchase programme, the common currency is dropping toward a key psychological barrier. Extensive technical support is still in place near the 1.20 mark, and European fundamentals remain relatively positive – but there is risk that a decisive break could create the room needed for a discontinuous move toward much lower level.
The pound sterling also fell sharply after the Office for National Statistics said that first-quarter growth had fallen to 0.1 percent – the slowest rate in five years. Renewed economic weakness will further reduce pressure on the Bank of England to tighten monetary policy at its next meeting in May – potentially giving Mark Carney the breathing room needed to avoid another growth-strangling interest rate hike.
Bottom Line: The “synchronized global growth” narrative which dominated the conversation until a few weeks ago continues to self-destruct, triggering renewed volatility in foreign exchange markets. Causes are difficult to pin down, but increased trade protectionism, tightening financial conditions and rising oil prices have seemingly dampened the animal spirits that drove Europe’s expansion at the end of last year – while the United States continues to experience solid growth. If sustained through the coming months, monetary policy trajectories will diverge – and with speculators overwhelmingly long euros and commodity-linked units like the Canadian dollar, currency-market bloodshed looks increasingly inevitable.
To receive our Weekly Market Briefing and Research Reports direct to your inbox subscribe!
“Cambridge Global Payments” is a trade name, which in this document refers specifically to one or more of these legal entities: Cambridge Mercantile Corp., Cambridge Mercantile Corp. (U.S.A.), Cambridge Mercantile Corp. (Nevada), Cambridge Mercantile (Australia) Pty. Ltd.
Cambridge Global Payments (“Cambridge”) provides this document as general market information subject to: Cambridge’s copyright, and all contract terms in place, if any, between you and the Cambridge entity you have contracted with. This document is based on sources Cambridge considers reliable, but without independent verification. Cambridge makes no guarantee of its accuracy or completeness. Cambridge is not responsible for any errors in or related to the document, or for damages arising out of any person’s reliance upon this information. All charts or graphs are from publicly available sources or proprietary data. The information in this document is subject to sudden change without notice.
Cambridge may sell to you and/or buy from you foreign exchange instruments (including spot and/or derivative transactions; both kinds are here called “FXI”s) covered by Cambridge on a principal basis.
This document is NOT: 1) Advice of any kind, or 2) Approved or reviewed by any regulatory authority, or 3) An offer to sell or a solicitation of an offer to buy any FXIs, or to participate in any trading strategy.
Before acting on this document, you must consider the appropriateness of the information, based on your objectives, needs and finances. For advice, you must contact someone independent of Cambridge.
Certain FXIs mentioned in this document may be ineligible for sale in some locations, and/or unsuitable for you. Contact your Cambridge representative for further information regarding product availability/suitability before you enter into any FXI contract.
FXIs are volatile and may cause losses. Past performance of a FXI product cannot be relied on to determine future performance.
This document is intended only for persons in Canada, the US, and Australia. This document is not intended for persons in the UK or elsewhere in the EEA. In Australia, this publication has been distributed by Cambridge Mercantile (Australia) Pty. Ltd. (ABN 85 126 642 448, AFSL 351278); for the general information of its customers (as defined in the Corporations Act 2001). This entity makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.
Fees may be earned by Cambridge (and its agents) in respect of any business transacted with Cambridge.
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact the applicable Cambridge if you wish to use Cambridge services to enter a transaction involving any instrument mentioned in this document.
© Copyright 2018, Cambridge Mercantile Corp., ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Cambridge Mercantile Corp. See www.cambridgefx.com for contact details.