US Economic Update – 04 February 2015

Dialling back our expectations for FOMC action and for the US dollar

At the end of a busy week for economists, analysts and investors across the globe, US GDP figures for Q4 surprised on the downside Friday, with actual output expanding at just 2.6% on an annualised basis and not the projected 3%.

The lower than expected GDP number was also accompanied by a further decline in the employment cost index, which fell during the final quarter as wage growth in the US appeared to cool further.

The net effect of a wobbly economic performance and some disconcerting statements which emerged from US boardrooms during the week were lower equity markets in the US.

Key to investor concerns during the period was the largest number of earnings downgrades since 2009, exacerbated by an ever more dovish statements from corporate executives.

The culprit behind this reversal in fortunes for US corporates has been the impact of lower oil prices in the resources sector as well as the hit delivered to the bottom lines of exporters by the rapid strengthening of the US dollar during the last six months.

In light of  weaker US growth, low price pressures and rising concerns over corporate earnings, markets have begun to revise expectations for interest rates in the US to Q4 in 2015.

As a result, and after a strong run throughout recent months, the US dollar and US equity markets now appear poised for a deeper correction than that seen over the last fortnight.

The moderation of expectations in relation to interest rates does not come as a surprise to us given that our expectations for the full year, in terms of the US dollar, have largely been met already (1.1250 EUR/USD).

Looking ahead to the coming weeks, we expect to see the US dollar weaken against both the British pound and the Japanese yen, while we look for consolidation in EUR/USD.

In terms of equity markets, we look to see initial concern over earnings drive markets further back from the peaks seen late last year, although this weakness should be limited given the counterbalancing effect upon expectations of a weaker dollar.

Dow Jones / 10 Minute Intervals



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