Home / Blog / Market Analysis / Markets Morning - Solid US growth fails to ignite markets amid tech woes and a print lower than expectations

Markets Morning - Solid US growth fails to ignite markets amid tech woes and a print lower than expectations

Market Analysis /
Greg McKenna / 30 Jul 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.41 am Monday July 30)


That’s the nominal growth rate the statistician reported on its initial count of US Q2 GDP on Friday night. That’s a big number. Remarkably though because that number was “deflated” by 3% inflation – NOT A TYPO – the “real” GDP reported was 4.1% - lower than expected in both the polls and the whisper number on the street.

Consumers and business did their bit for the economy, as did trade. Though trade seemed to be impacted by the pull forward of sales to avoid the tariffs meaning that it will be less of a tailwind for the US economy going forward given the still strong USD and the reality China doesn’t appear to want to buy as much soy and Europe can’t go close to replacing that demand.

What’s remarkable though is the 3% deflator. 3%! The Fed is not expected to tighten at this week’s meeting. But it must surely be on track to hike rates again in September given the strength of the domestic economy evidenced in this GDP result and that deflator.

The US dollar didn’t get much of a lift. Indeed forex rates for the most part hardly moved given the outcome was mildly weaker than expected by economists and given we are increasingly seeing forex pairs trapped inside their ranges or trend channels right now. To that end EURUSD is at 1.1658 this morning stuck inside the wedge inside the range. USDJPY is at 10.93 as we all await the BoJ’s decision tomorrow. “No change” is the favourite, but “subtle tweaks” is looming at her shoulder as we race to finishing line of the BoJ’s decades long monetary experiment.

Sterling is at 1.3099 and surely destined for a Brexit induced fall at some point, even if Mark Carney and his colleagues at the BoJ ratchet rates higher this week as most expect. The Aussie dollar retook 74 cents on Friday night and it’s just hovering near there at 0.7399 in very early forex trade.  The Kiwi is at 0.6791 and USDCAD is at 1.3054 consolidating a little of the recovery from last week’s big fall.

To stocks then and Twitter lost around 20% as investors were somehow surprised that the recent purge of followers we all saw DID actually impact daily users. Facebook ended on the back foot again as well, while Intel was also lower. Not exactly a tech wreck, but the Nasdaq ended down 1.4% to 7,296 and under a little pressure after the clear divergence in outlooks among the generals of the advance.

That has implications for market sentiment more broadly and the S&P500 dropped 0.65% to 2,818, the Dow dipped 0.3% to 25,451, and the Russell 200 fell 1.89% to 1663.

After rallying 0.89%, 56 points, Friday the ASX 200 is likely to open lower given SPI traders followed the US, not European, lead and have knocked 26 points from where prices were Friday afternoon. Speaking of Europe the FTSE 100, CAC, DAX, and FTSEMIB were all up between 0.4% and 0.6%.

Commodity markets saw copper dip back a little once more – HGc1 is at $2.7895 – amid a mixed but mostly positive day for base metals. Miners did okay too. Oil was a little lower with WTI dropping around 90 cents for a fall of about 1.3% to $68.69. Brent was more circumspect at $74.29, down 0.3%.  

Gold is at $1223 hardly change and Bitcoin has weathered the SEC decision not to allow the Winklevi ETF rather well. It’s at $8,205 bouncing sharply in the last 8 hours of the week after falling below$7800 at one stage Friday. US 10’sare at 2.96%, the 2’s are at 2.68% and the curve is at 28.

On the day it’s quiet here at home. Retail sales are out in Japan, consumer credit (debt) is out in the UK along with mortgage lending data. In Europe we get Euro area data for business and consumer confidence and sentiment along with inflation expectations before German inflation data for July. Pending home sales and the Dallas Fed manufacturing index is out in the US.

Oh, and over the weekend President Trump threatened to shut down the US government if he doesn’t get the money for his Mexican wall.

Have a great day.      

Macro Stuff that affects everyone and everything – either today or eventually


  • I know that the economics fraternity likes to report GDP in “real” terms not nominal terms, but I’ve always thought there is nothing “real” about inflation-adjusted GDP numbers if you are trying to get a handle on what businesses and consumers are actually feeling. That’s my peculiar take because I’m always looking through a behavioural lens at things. And it comes with a caveat that “real” GDP is absolutely the number I want to look at if inflation is getting out of hand (Venezuela and Zimbabwe come to mind) but then I’m interested on the behavioural impact of rampant inflation. That’s for another day though. The reason I raise this is that the 7.1% nominal growth rate reported for the United States in Q2 is the growth rate consumers and businesses will be feeling.
Source: WSJ
Source: WSJ
  • Once the 3% deflator is knocked off the top the real rate falls to 4.1%. That was lower than expectations but still solid. Of course this growth is in no small part fuelled by the fiscal policies of the Trump Administration and so would be expected to fade through time. But the strength in private consumption which grew at a 4.3% rate and the fall in the savings rate from 7.2% to 6.8% suggests consumers feel great and the outlook for and health of the domestic economy remains strong.  Net exports 1.06% contribution may drop given there appears to have been pull forward of exports in the quarter for about half that contribution. But overall this is a solid set of numbers.
  • But folks, traders and investors have assimilated them. As you’ll see below the US eco surprise index is actually still slipping. So while the data keeps the Fed on track to raise rates next month – after 2 more non-farms and another couple of sets of PMI’s – this economic strength is already baked into the cake and the US economy will need to generate further strength is stocks and the US dollar are to get a sustainable lift. How else can you explain the fact the 10’s are still below 3%?
  • While the US GDP was solid what’s important for traders and investors transacting in the immediate term is the flow of data. Not the actual outcomes per se, but rather how that data flows relative to expectations. It’s why I always talk about the Citibank Economic Surprise Indexes (CESI scores as I call them. So, as we head into the new month of data starting Wednesday and as we await US non-farms on Friday it is worth noting that the US CESI score slipped again last week. It’s fall has been a big part of the stalling of the US dollar in the past few months. Strangely Australia and Japan are the best performers at the moment.
Click on me, I'll expand
Click on me, I'll expand
  • Brexit folks, watch out. UK press over the weekend carried stories of a backlash among grass root Tories to Theresa May’s plan. At the heart of it is what Boris Johnston wrote in his resignation speech. That is that what May is trying to deliver is not what was voted for and worse than staying a member of the EU. At the core of it is the subjugation – or peoples belief in it – of UK courts to their EU equivalents in some matters without the UK’s ability to argue or influence EU decisions. YUK, what a mess, here’s a link to the Telegraph story.  
  • And while we are talking Brexit and Europe how can we forget the smoldering that might one day ignite in Italy. Over the weekend Italy’s deputy Prime Minister Matteo Salvini basically told Mrs May to get aggressive with the EU saying their was “no good faith” on the EU side of the debate. While Beppi Grillo, founder of the 5-Star movement said it’s time for an Italian referendum on whether to stay in the Euro, “not in Europe, the Euro” he said. The Italian Prime Minister says there is no such plan which is kind of Grillo’s point. He wants the vote so the Italian government can work on a plan B.   
  • Watch out for Caterpillar’s results Monday. Recall last earnings season it was the comment by the CAT CFO that Q1 likely marked the high water mark for growth which spooked traders on the day on for a couple of weeks afterwards.  

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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