The 2nd quarter GDP release came in much weaker than anticipated, posting a 1.3% annualized growth rate, compared to forecasts of a gain of 1.8%. On top of that, the 1st quarter GDP figures were revised lower, showing just a 0.4% annualized rate in the 1st quarter.


Here are the highlights from the Release:

  • Consumer spending edged up by an annualized rate of 0.1% in April through June, the weakest it has been in two years, after a 2.1% gain in the first quarter.
  • Business spending jumped 6.3%, helping to add to growth.
  • Trade added 0.58 percentage point to growth as a 6.0% jump in exports outpaced the 1.3% gain in imports.
  • Housing investment rose by 3.8% in the quarter.
  • Gov't spending fell.
  • A big reason behind the downward revision in first-quarter growth was that the inventory buildup by companies was less than initially estimated, while outlays by the federal government and consumers were also revised down.

Importance for Fundamental Bias of USD:

The extremely slow growth that we saw in the 1st quarter, and the weak data from the 2nd quarter adds pressure on the Fed to help stimulate the economy and this will again open the doors to more talk of quantitative easing.

It also means that job gains are likely to be subdued in the 2nd half of the year as consumer spending retrenched and therefore demand within the economy will not support the need to hire more staff.

In other words, this report dashes the hopes that the US economy just went through a "slow patch" the first half of the year, and instead the US faces a slow and sputtering economy.

Will the Fed ride to the rescue with another round of bond buying? Well, Bernanke has made it pretty clear that he needs to see underlying inflation cooling, and the threat of deflation risks to resurface before he acts.

Also, while the revision to 1st quarter GDP looks ghastly, we are more focused on future growth and how that impacts jobs. The previous 2 months have seen horrid jobs numbers, and July is not likely to be much better considering the uncertainty business are facing with the debt ceiling debate going on in Washington.

Impact on Currency Markets - USD Hammered:

The reaction in currency markets was swift and we saw the USD slide sharply against its safe haven rivals - JPY and CHF. The USD/CHF hit a record low, while the USD/JPy fell to the 77 level.

The CHF and JPY also showed strong gains against other higher yielders such as EUR, GBP, and AUD.

The EUR/USD and GBP/USD were stronger, as the USD came under intense pressure against its key rivals, but currencies linked to global growth and commodities like the AUD, NZD and CAD were weaker initially against the USD as the weak US GDP release increased worries over slower global growth. However the AUD/USD and NZD/USD pairs recovered some of those post release losses. The USD/CAD pair rallied to 0.9590 as the Loonie was pressured because of its own weak GDP release - with its economy down 0.3% in May.

Nick Nasad
Chief Market Analyst