Daily Market Pulse
Dollar Back on Top as US GDP Beats Expectations, Germany Enters Recession5 minute read
The Dollar is on the upswing again this morning, up around 0.3% amidst a slew of new economic data from the US and abroad.
The US economy grew by 1.3% in Q1, higher than expected, led by increased consumer spending, exports, federal government spending, state and local government spending, and non-residential fixed investment. Meanwhile, corporate profits in the US dropped significantly in Q1, with a 6.8% decrease, much more than market expectations of just a 0.9% fall.
On the jobs front, the four-week average of initial jobless claims was slightly up from the previous month but still below market expectations, suggesting the US labor market remains relatively strong.
In other news, Fitch Ratings placed US’ AAA status on “rating watch negative,” citing concerns about the brinkmanship over the debt ceiling and the failure to address medium-term fiscal challenges. However, House Speaker McCarthy expressed optimism that a deal to raise the debt ceiling would be reached before the government faces an unprecedented default.
The Euro is down for the third straight day this morning as traders digest the double dose of GDP data from Germany and the US. EUR/USD was down nearly 0.3% on the day and 0.8% for the week in the initial aftermath of the US release.
Germany’s economy contracted by 0.3% in Q1 2023, marking the second consecutive quarter of decline and officially pushing Europe’s largest economy into recession.
The primary drivers of the Q1 contraction were high prices and borrowing costs. Meanwhile, Germany’s GfK Consumer Climate Indicator increased for an eighth month to -24.2 heading into June, mainly due to a declining household savings rate and expected wage gains. However, consumer sentiment is still negative and below pre-pandemic levels.
The Pound enters the US session slightly lower against the Greenback after losing nearly 0.4% yesterday.
Investors are still coming to terms with yesterday’s inflation data that revealed the UK’s core inflation rate rose to a 31-year high of 6.8% in April. As a result, yields on UK government bonds rose as investors anticipated more interest rate hikes from the Bank of England.
Still, concerns about the UK’s economic situation may outweigh the potential benefits of higher rates for the Pound.
GBP traders now look to tomorrow’s retail sales data out of the UK for a fresh read on the British economy, with expectations of a small month-on-month growth in April after falling 0.9% in March.
After beginning yesterday’s session modestly higher against the Greenback, the Yen reversed course and finished the day down over 0.6% on route to its lowest level since November 2022.
This morning, the fall continues as JPY drops another 0.15% heading into the US session.
Overnight, Bank of Japan Governor Ueda discussed the Bank’s current balance sheet, consisting of significant holdings of Japanese government bonds and ETFs, and acknowledged it is not typical for a central bank. However, Ueda said the BoJ would need to maintain this posture until a stable and sustainable 2% inflation target is achieved, meaning Japan’s “easy money” policy will likely stay in the short run.
The Loonie fell over 0.65% against the Dollar yesterday as market jitters over the US debt ceiling outweighed the benefits of another strong day for oil prices.
However, in the aftermath of this morning’s US GDP and jobless claims data, the Loonie is mostly unchanged against the Greenback.
Oil prices have taken a step back this morning, plunging around 1.7% in early morning trading as yesterday’s boost from the threat of OPEC cuts and higher-than-expected US inventories quickly fades as risk-off sentiment takes hold.
Meanwhile, Canadian small business sentiment reached an 11-month high, with most sectors improving, although labor shortages still concern small businesses.
The Peso finally snapped a six-day losing skid yesterday, gaining nearly 1% against the Dollar.
This morning, MXN is unchanged as traders digest data from Mexico and the US.
Mexico’s trade balance for April came in below expectations, posting a deficit of $1.509B against an expected $1.2B deficit. This comes one month after posting a surprisingly large $1.169B surplus in March – the widest surplus since February 2022.
The focus now shifts to GDP numbers out of Mexico set for release tomorrow, where markets anticipate quarter-on-quarter and year-on-year growth rates to match their previous readings of 1.1% and 3.9%, respectively.
The Brazilian Real finished yesterday at a one-week high, posting a respectable gain of nearly 0.4% against the Dollar. However, BRL has since given back all those gains and more today after US and Brazilian economic data releases.
Earlier this morning, May’s IPCA mid-month inflation rate came in at 0.51% - less than the 0.64% expected by markets and nearly identical to the previous read of 0.57%.
Despite beating expectations, the data shows that inflation remains on the upswing.
Also in the news yesterday, Brazilian President Lula publicly assailed central bank leader Campos Neto for the latter’s hawkish stance on interest rates, despite Neto’s belief that high-interest rates are necessary to cool demand in the economy and combat inflation.
The Yuan is back in the red this morning after barely hanging on to a minute gain against the Greenback yesterday. As traders digest the release of US GDP and jobless claims, the offshore Yuan is down around 0.4% today and about 1% on the week on-route to its lowest level since November 2022.
Devoid of any economic data out of China this week, investors are looking forward to China’s April industrial profit data and May PMIs to provide the next pulse on China’s economic recovery, with the former set for release this Saturday and the latter next Wednesday.