THE TAKEAWAY:US Gross Domestic Product (1Q T) > Labor Market Weakening; Consumption Slowing > AUDUSD Bearish, EURUSD Bullish, USDJPY Bearish
First quarter growth was confirmed at an annualized rate of 1.9 percent on Thursday, putting to rest concerns that another sharp revision could surprise market participants. This being the final revision of the first quarter reading, most of the data came in largely unchanged from the second growth reading, though there were some important differences.
Primarily, it’s worth noting that Personal Consumption dropped to a rate of 2.5 percent from the initial 2.7 percent reading, while the GDP Price Index jumped to 2.0 percent from 1.7 percent. Similarly, the Core PCE reading rose to 2.3 percent from 2.1 percent. When considered all together, a trend that arose at the end of last year has evidently continued: consumers’ purchasing power has been dwindling and it’s starting to affect broader consumption trends.
Consumption is the most important aspect of the US economy, considering that some 70 percent of the headline GDP figure is derived from consumption. If prices are rising (as per the GDP Price Index) and Personal Consumption is weaker than though, it’s evident that wages adjusted for inflation are falling as well. With the savings rate at its lowest rate since before the 2008 market crash, the US consumer is in an exceptionally vulnerable place. Operation Twist won’t solve this; another round of outright bond purchases won’t solve this either; and thus the Federal Reserve is in a very precarious position with few options to stimulate growth.
AUDUSD 1-min Chart: June 28, 2012
Charts Created using Marketscope – Prepared by Christopher Vecchio
In the minutes following the announcement, the US Dollar weakened slightly across the board but rebounded soon after as market participants digested the data. Of note, the Euro and the Japanese Yen firmed up against the US Dollar while the Australian Dollar declined. Soon after, the AUDUSD and EURUSD were both lower, but this has more to do with general risk-aversion flows rather than the print, per say.
--- Written by Christopher Vecchio, Currency Analyst
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