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US Breaks First-Quarter Curse, SADness Strikes Europe

by Karl Schamotta | April 27, 2018

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.

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