Daily Brief

Respite for the dollar

Big GDP shrinkages

There was wailing and gnashing of teeth on Thursday after a weak figure for US gross domestic product sent the USD further on its downward journey. The dollar staged a modest recovery on Friday when it became clear that European economies had had an even tougher time in Q2.

America’s insistence on reporting quarterly GDP in “annualized” terms, rather than quarter-on-quarter, has long been a source of confusion. Thursday’s report of a 32.9% contraction in Q2 looked shocking next to Germany’s -10.1%. However, a handful of GDP readings from around Europe the following day made the US number look less bad once it had been normalised for comparison purposes. On a QoQ basis the US economy contracted by 8.2% in Q2, the German economy by 10.1%, France by 13.8%, Italy by 12.4% and Spain by 18.5%. Pan-Euroland GDP shrank by a quarterly 12.1%

Although none of those numbers makes the US outcome look good, they do confirm that Europe was hurting in the second quarter of the year. The news did not solve the US dollar’s problems at a stroke but it did turn down the heat somewhat. On Friday, the USD rose by an average of 0.6%, strengthening by three eighths of a cent against sterling and a cent and a quarter against the euro.


Low inflation

Along with the GDP readings there was a handful of European consumer price index data on Friday. Some low numbers were to be seen, principally as a result of distorted spending patterns during and after the economic shutdown.

In France, consumer prices increased by 0.8% year on year, a welcome pickup after three months of inflation between 0.2% and 0.4%. In Italy, the rate of inflation was either -0.3% or 0.9% depending on method of calculation, not exactly the most helpful information. The euro zone as a whole reported a 0.4% headline rate of inflation with “core” inflation at 1.2%. Annual rates of inflation throughout the euro zone varied between -2.1% in Cyprus and 1.8% in Slovakia, both estimates.

Britain’s contribution was Nationwide’s house price index. It completed a clean sweep of above-forecast UK economic indicators for the week, with prices 1.5% higher on the year. Nationwide warned that “there is a risk this proves to be something of a false dawn” if labour conditions weaken as predicted.


Here come the PMIs

Japan reported this morning that GDP contracted by 0.6% in Q2. Other than that statistic, just about all the data today are purchasing managers’ indices for the manufacturing sector.

The Australian manufacturing PMIs from Ai Group and Markit came in at 53.5 and 54, in both cases an improvement on the month. China’s Caixin index was also higher at 52.8 and Spain was back in the growth zone at 53.5.

PMIs from Europe and the States today are all expected to be above 50. Britain’s manufacturing PMI is pencilled in at 53.6. Tonight brings Australia’s balance of trade and retail sales as well as the Reserve Bank of Australia’s monetary policy decision. No change is expected.

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