US Long-Term Growth Downgraded

Analisi Giornaliera - 29/05/2015

Analysts Are Increasingly Adjusting GDP Expectations Downward in Response to Flagging Fundamentals

Despite a multitude of promises from the Federal Reserve to raise interest rates, the US economic outlook remains mired in over-optimism as evidenced by the latest revisions downgrade to GDP expectations from major financial institutions.

Outlook Revised Lower

Following the upgrade earlier in the week to GDP expectations according to the Atlanta Federal Reserve GDP model which anticipates second quarter growth near 0.80%, investment banks are in the process of downgrading their own GDP estimates for 2015 as increased headwinds drag on the outlook. Goldman Sachs in particular has revised its long-term outlook for US economic expansion to 1.75% from a prior 2.25% in a sign of declining confidence in the economy. However, in another positive sign for the housing economy, pending home sales rose more than initially forecast, accelerating to 3.4% from a prior 1.20% on expectations of a 0.90% rise. This could translate to a rise in existing home sales in the next reporting period, adding to optimism that the housing recovery is not lopsided as was witnessed in previous months. The dollar has retreated from recent gains, but could move higher today if GDP manages to meet or beat expectations.

Oil Rebounds on Inventories

Following an American Petroleum Institute crude stocks figure that showed inventories growing by 1.268 million barrels in the prior week, EIA data released yesterday showed supplied dropping by 2.802 million barrels. This led to a spike in prices which earlier in the session hit the lowest level in over a month. The rebound in energy prices came on the heels of a cross of several major technical support levels in both the WTI and Brent benchmarks. However, as production data showed yesterday, oversupply is likely to continue to prevent further upside in crude oil prices after US output rose by 3.28% in the latest period. This adds over 200,000 barrels per day to current production figures as inventory levels remain above average seasonal levels. Coupled with additional Iraqi supply and no forecast change to OPEC output, the bounce in prices is likely to prove temporary.

Disinflation Arrives in Japan

Data released overnight confirmed the Bank of Japan’s reservations about the inflationary outlook as national core CPI slipped from an annualized 2.20% to a meager 0.30%. It would have slid more had it not been for the weakness in the Yen which is helping to keep import prices elevated. The regular national CPI figure showed similar weakness, dropping to 0.60% from 2.30% while the real news was the continued contraction in household spending. On a monthly basis, spending tumbled by -5.50% compared to expectations of a -0.70% drop while annualized consumption figures shrank by -1.30%. The silver lining in the data was the unemployment rate which dipped modestly from 3.40% to 3.30% in the latest reading while industrial production managed to rise 1.00% month over month. USDJPY continues to push higher, keen to retest multi-year highs reached during yesterday’s trading session.

USDCHF Equidistant Channel Technical Pattern

Even with the dollar retreating from recent gains, the Swiss GDP data delivered this morning showed that the continued appreciation in the Swiss Franc is impacting the nation’s growth outlook. Despite the gains in purchasing power for consumers, exports continue to feel the impact of a stronger currency, adding to the downward pressure on growth. The USDCHF has been improving as of late owing to stronger US data and expectations of coming rate hikes. The equidistant channel pattern has a bullish bias with the formation setting up since the middle of the month, helped by the rebounding dollar. The ideal strategy for utilizing the setup is initiating positions at or near the lower channel line to be closed at the upper channel line. Any move outside the channel lines should be considered a breakout trade to be accompanied by increased volume and momentum.