Business & Economy

US Economy Contracts by an annualised 2.9%

01 July, 2014

Βy Jameel Ahmad, Chief Market Analyst at FXTM

Last week focused on the surprising announcement that the US Federal Reserve is downgrading their overall 2014 economic growth forecasts. Their reason for doing so was due to an admittance that the adverse weather the United States faced over the New Year period, had a far more detrimental impact on their economy than they first envisaged. The US central bank’s economic downgrade created a fear of anxiety regarding the US first quarter GDP confirmation, scheduled to be announced last Wednesday. Unfortunately, it was not positive news. The US economy contracted by an annualised 2.9% during the first quarter of 2014, their worst GDP reading since 2009.

Although it is predominately accepted that the GDP contraction was caused by an atrocious winter weather period, attention will now be focused upon how much of the GDP contraction can be recovered in the following quarter. In reference to other US economic releases last week, performances were mixed. US Manufacturing ISM’s expanded at their fastest rate in four years. This is positive news, considering the US manufacturing sector equates to nearly 17million US jobs, but Durable Goods Orders (-1%) and Personal Spending (0.2%) fell below expectations. Bearing in mind that consumer spending contributes to 70% of the US economy, the personal spending release was looked at unfavorably.

Moving on to the United Kingdom, although economic releases were low in volume last week, the Bank of England (BoE) and more specifically, BoE Governor Mark Carney were still featured in the headlines. Last Tuesday, Carney and three members of the Monetary Policy Committee (MPC) testified in front of the UK Parliament Treasury Committee, and the testimony concluded with the group being accused of sending mixed messages regarding a UK interest rate hike. Just under three weeks ago, Carney announced that the BoE may increase interest rates sooner than the markets expect. However, during the testimony in front of the UK Parliament Treasury Committee, Carney announced that there is no specific time duration to increase interest rates, instead the decision will be encouraged by data driven economic data. Although, Carney did hint that a UK unemployment rate below 6%, alongside a noticeable advancement in UK average wage growth would entice a rate hike sooner.

In regards to the European economy, economic releases continued to add substance to the speculation that there are signs that the EU economic momentum may be slowing down. This was suggested by the Head of the International Monetary Fund, Christine Lagarde during a recent EU Finance Ministers meeting in Luxembourg, and last week’s economic performances provided some validity to those claims. Last Monday’s Markit PMI showed that EU economic activity slowed to a six-month low. Monday’s PMI’s also showed further PMI contraction in France, while Germany’s IFO estimates on Tuesday failed to meet expectations.

However, the week ended on a positive note when it was announced that Germany’s CPI (inflation) increase month on month to 0.3%. This encouraged some optimism that the recent ECB stimulus measures, may be having a positive effect.

What to watch this week:
Due to the United States markets being closed this Friday for Independence Day, the US non-farm payroll (the number of jobs the US economy created last month) will be released this Thursday. With the latest European Central Bank (ECB) interest rate decision and Mario Draghi’s live press conference also being scheduled for Thursday, this has the potential to become one of the most volatile trading days of the year.

In regards to the US non-farm payroll release, after last week’s disappointing GDP contraction, the United States would highly benefit from a positive NFP this Thursday. Although Janet Yellen refrained from offering a specific time duration regarding an interest rate rise during the latest FOMC meeting, a figure above 230,000 may entice domestic speculation regarding what timeframe the Federal Reserve may be considering for an interest rate increase.

In reference to the ECB interest rate decision, I feel it is unlikely that the European Central Bank will change monetary policy for two consecutive months. However, there is still the potential for market volatility during Mario Draghi’s press conference, following the interest rate decision. Draghi will likely be answering questions regarding whether he feels the EU economic momentum is slowing down (like IMF head Christine Lagarde has recently suggested) or whether he feels the ECB needs to implement a quantitative easing program in the future. If he is asked these questions, the manner in which he answers them will be pivotal towards which direction the EU currency fluctuates.

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