The market's reaction to last week's US GDP figures is somewhat baffling to us. The 2.4% annualized pace of growth certainly missed the ambitious 2.6% that consensus had been predicting, but in absolute terms this was still an extremely robust figure for a fully developed economy. Furthermore, the massive upward revision to last quarter's reading (from 2.7% annualized quarterly growth to 3.7%) would superficially seem to be a more than adequate spoonful of sugar to make up for that slight miss in Q2.  

The devil, as always, was in the details - with the annual benchmark revisions revealing a deeper recession than had been originally reported. Still, the important factor for us is that the direction of GDP growth is unquestionably heading in the right direction, and in addition, Friday's release of core PCE (one of the Fed's favoured measures of inflation) was a bigger than expected 1.1% QoQ (compared to the 1.0% forecast) and there were sizeable upward revisions to last quarter's print (to 1.2% from 0.7%). On balance therefore, we have been quite surprised to see USDJPY dip to new 2010 lows on a 95-handle, especially considering the palpable Japanese discomfort at such a strong JPY down at these levels.    

Perhaps one reason for such sensitivity to risk aversion is down to the early murmurs of distress from California over their own deficit problems - a story which bears more than a passing similarity to the early days of the Eurozone debt crisis. As the 8th largest economy in the world in its own right, the public call for austerity measures to avert an otherwise inevitable disaster is indeed worrying, and begs the question whether this may just be the first victim in a US debt crisis that could easily rival or surpass that which is playing out in Europe.

Today's Key Issues (time in GMT):
14:00 USD ISM Manufacturing index (Jul), 54.5 eyed; last 56.2