US Economy Likely Advanced at a Slower Pace in Q1, 2017

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The preliminary estimates for the first quarter’s gross domestic product (GDP) for the U.S. will be published today by the Department of Commerce.

Economists polled have forecasted that the pace of economic activity in the three months ending March might have increased at a slower pace of 1.3%, compared to the previous quarter (Q4) of 2016.

The U.S. economy advanced 2.1% in the fourth quarter of 2016 on an annual basis. It was also a weak print as economic activity was suppressed as a result of a decline in exports.

The U.S. GDP expanded at a pace of 1.9% on an annual basis and was significantly lower from the 3.5% growth registered in the third quarter of 2016. For the whole period of 2016, the U.S. GDP expanded at a pace of 1.6% which was the slowest pace of expansion in a five-year period.

Weak expansion set to continue into Q1 2017

Prospects for a weak headline print is widely anticipated and priced in as the first quarter pace of growth mirrors the economic activity from last year. However, despite some bleak numbers, the economic activity is expected to have regained some of the lost momentum heading into the second quarter.

Various measures of the U.S. quarterly GDP growth point to below-forecast expectations.

The widely tracked GDPNow model from the Atlanta Fed shows that economic expansion slowed to a pace of 0.2% in the first quarter. This was down from the previously estimated 0.5%. The Atlanta Fed said that the first quarter real consumer spending growth declined to 0.1% after this week’s annual retail trade revision.

Atlanta Fed GDPNow Forecast Q1 GDP: 0.2% (Source: FRB Atlanta)
Atlanta Fed GDPNow Forecast Q1 GDP: 0.2% (Source: FRB Atlanta)

Contribution of inventory investment also fell 1.11% as a result of yesterday’s durable goods orders numbers.

The U.S. Department of Commerce released the monthly durable goods orders for March which showed a modest pickup but was far from positive.

Orders for durable goods increased 0.7% from the previous month and marked the slowest pace of increase in the three months. Excluding transportation, the core durable goods orders fell 0.2% during the month.

CNBC/Moody’s analytics which is an independent GDP tracker showed the median estimates sitting at 0.8% for the first quarter figures, which shows the sluggish pace of growth.

Despite the apparent weakness, economists are focusing on the second quarter growth which is expected to bounce back to the 3% figure. In the longer term, the GDP expansion gives a somewhat better picture.

JP Morgan analysts are signaling a 0.3% increase in the first quarter while Deutsche bank analysts are expecting a 1% increase.

Today’s GDP numbers will weigh on the Federal Reserve Bank’s officials as the FOMC members are slated to meet next week on Wednesday May 3rd for the monetary policy meeting. The meeting comes in the context of March’s weak payrolls report and today’s GDP figures which will potentially impact the rate hike expectations.

The Fed is expected to push the rate hike lever next when it meets in June 2017, provided the U.S. economy shows signs of getting back on track.

Trading the U.S. advance GDP report

EURUSD, USDJPY will no doubt be the two currency pairs of interest going into today’s high impact release. EURUSD has turned bearish for the past two sessions after prices stalled near a 5-month high at 1.0949.

Yesterday’s ECB meeting added to the bearish sentiment in the euro. Price action indicates a possible weakness in the EURUSD but this will need to be validated by the market reaction to the GDP figures due later today.

EURUSD – Trading the U.S. Advance GDP Report
EURUSD – Trading the U.S. Advance GDP Report

Watch out for the resistance level at 1.0900 – 1.08865. If the resistance holds expect the EURUSD to decline lower as price action will be testing the lower support level near 1.06825. The bearish bias will be invalidated if we see a daily close back above 1.0900.

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