First Quarter GDP Comes In Lower Than Expected

This week shaped up to be one of the busiest on record for all of us here that I can remember as the market volatility and plethora of data provided us with endless excitement. As we close the books on April, the dollar saw increased selling pressures with several currencies setting new records, gold and silver trading at or through all time highs, and the euro (EUR) knocking at the door of 1.50. We’ll see if this carries over into May or if there’s some type of circuit breaker, such as Europe’s debt problems, that re-surface in order to keep the dollar from hitting the floor.

As I mentioned yesterday, it was a data rich day, so let’s look at the tape and see what happened. But first, let’s see what Chuck had to say…

Well… Now you all can’t say that I didn’t tell you this was going to happen… First-quarter US economic growth slowed to 1.8%!!! Didn’t I tell you that 2010 was going to be the high for economic growth? Didn’t I tell you that without government stimulus, either through cash for clunkers, or whatever cockamamie scheme they were coming up with, the economy didn’t have legs?

And the Fed is going to pull the stimulus/financial cocaine away from the economy at the end of June? I would laugh out loud… But that would be insensitive! One of my fave lawmakers, and one of the few lawmakers that “has a clue”, Ron Paul, had this to say about Big Ben’s talk yesterday…

“It was more justification for a policy that doesn’t work. There was no explanation on how he’s going to get out of this. He did recognize, though, that price increases are significant and could be a problem in the future. It could be a significant problem for unemployment. He said it softly, but there were some words in there that convinced me that he knows that when inflation is admitted – I think it’s already here – but when he really admits it’s here, he’s really in a box. Because what he’ll have to do is raise interest rates, cut back on all the monetization of all this debt, buying all these securities, and then, in a weak economy, he’s in a mess.”

Yes, he’s in a mess, Bernanke that is… But… Remember what I told you about the end of QE2… It will fill the spirits of the dollar bugs for a couple of months, and then WHACK!

As Chuck just mentioned, the big news (and it wasn’t the royal wedding) was the initial showing of first quarter GDP here in the US. I guess the Fed’s downward revision of growth for this year on Wednesday afternoon was a foreshadow to the disappointment we saw yesterday. Most economists were looking for it to come in at 2%, but instead, fell to the slowest pace since the second quarter of last year and dropped quite a bit from last quarter’s 3.1% figure.

Dipping a little deeper into the figure, inventories rose at a $43.8 billion pace, compared with $16.2 billion in the fourth quarter. If we take inventories out of the picture, the economy would have only risen 0.8%. The housing/residential construction industry and the trade deficit both assumed their usual roles as they subtracted from GDP but manufacturing and durable goods spending more than provided the offset.

I found a comment from Bernanke’s press conference where he said that much of the slowdown in the first quarter is viewed by most on the committee as transitory. There he goes with that word again, transitory. As Chuck said, does he really believe the economy can stand up on its own without stimulus and shake the temporary slowdown that underperformed with the stimulus in place? Again, government spending has played a large role in our economic growth over the past couple of years and has displayed very little in terms of self-sustainability.

Moving on to the jobless claims, new applications for unemployment rose last week by 25K to 429K, which was the highest level in close to three months. While the four-week moving average on initial claims rose as well, we did see a drop in continuing claims by 68K to 3.64 million. Those collecting extended benefits also showed improvement by falling to 4.165 million, but there is still a lot of progress needed in this area to support a so-called moderate recovery.

We also had personal consumption for the first quarter rise more than expected by 2.7% but fell way short of the last figure of 4%. The Fed’s preferred gauge of inflation, core PCE, showed a higher-than-expected increase by rising 1.5%. Pending home sales showed mixed results as the monthly number rose by 5.1% but fell 11.5% year over year. Today will bring us personal income and spending along with some March inflation numbers.

If we sprinkle in some other secondary reports, such as the Chicago purchasing manager index, that gives us our day in data. Looking ahead to next week, we get our first look at the April jobs numbers with the ADP employment report, so that, coupled with factory orders, will be the focus leading us into the jobs jamboree on Friday. Other than that, there really isn’t too much on the data ticket here in the US as we kick off the first week of May.

Looking at the currency market, we had yet another day of retreat in the dollar as it declined for an eighth straight day. While returns were fairly tame for most currencies, we did see New Zealand (NZD) and Brazil (BRL) lose over 0.50% on the day as each had some type of less-than-ideal data that triggered a modest sell-off. The Brazilian real, which was the worst performer, saw a double whammy from slower credit growth and inflation.

Any inkling whatsoever that the pace of interest rate hikes may slow will send the real downward as this currency is a big destination for hot money, which are generally short term investors who are only looking for yield. Since this is still considered an emerging market, the rate differential is often used as a risk premium in that many investors would look past the currency if it weren’t for the interest rate.

Compare that logic to say, the Norwegian krone (NOK) or Swiss franc (CHF), where interest rates remain very low but are fundamentally sound. Total outstanding growth in Brazil only rose 1% in March and suggests higher interest rates are starting to filter through to the economy. Their broadest measure of inflation also rose less than expected by increasing 0.45%, which was the slowest monthly gain since last July. While the annual figure still increased by over 10.5%, it was still lower than the estimate of nearly 11%.

Inflation still remains well above their target so additional steps will definitely be needed to keep it under control, but the government likes to jawbone here and there in an attempt to convey that additional rate hikes really aren’t necessary and that they’ve already taken steps to address the issue. Moving on to a currency where inflation is not a problem, the New Zealand dollar came in second to last place.

The New Zealand central bank met yesterday and decided to keep rates on hold at the record low of 2.5% and looks to remain that way for the better part of this year. The central bank’s comments after the meeting are what stirred the pot. It’s not that he said anything earth shattering, but I guess he came off more dovish than what investors had hoped for.

Governor Bollard not only called the kiwi’s rise unwelcome, but also expressed that the outlook remains uncertain and given relatively low core inflation with continued economic disruption from the earthquakes, interest rates look to remain appropriate for some time. Again, the rise of the currency wasn’t necessarily due to strong fundamentals, but instead, it has been the carry trade and the fact that it’s getting grouped together with the Australian dollar.

As I came in this morning, the dollar index is flirting with its lowest level since July 2008. In fact, April will mark the fifth straight month of decline as interest rate expectations have risen in most countries except for the US. If we also take into account that risk seeking has steadily risen, the dollar didn’t have much of a chance, and that’s not even taking the underlying economic fundamentals into consideration.

To recap…The initial print of first quarter GDP came in lower than expected and doesn’t exactly lay the framework for the moderate recovery expected this year. First time jobless claims increased well above that hard-to-shake 400K mark while continuing claims fell. The dollar was lower for yet another day, but so were the New Zealand dollar and Brazilian real as recent data didn’t push the envelope for an immediate increase. Looking ahead to next week, we’ll see both factory orders and the results of April’s jobs numbers.

Mike Meyer
for The Daily Reckoning

The Daily Reckoning