US economy set to rebound

by: Maritza Cabezas , Georgette Boele

  • US business spending strong and consumer confidence stabilising….
  • …confirming our view that the US economy will bounce back in the second quarter
  • The dollar rally is gaining momentum

 

 


 

US business spending climbs for second month in a row

US durable goods orders declined by 0.5% in April after a strong jump of 5.1% the previous month. In March the large gains in orders was related to civilian aircraft and defence goods, which are particularly volatile. The more closely watched parts of this report, which provide a good indication of business spending, rose solidly in April. Core capital goods, excluding defence and aircrafts rose 1%, down from 1.5%. Meanwhile core  capital good shipments, used by the BEA to estimate investment in durable equipment in the National Accounts, rose 0.8%, down from 1% the previous month. These series had been weak at the beginning of the year, likely as a result of the port disruptions and there is some payback now.  This data suggest that the temporary headwinds are behind and that there is quite some momentum for investment at the moment. Indeed, a drop in business investment and weak exports have held back economic growth in the past few months. We expect the economy to bounce back in the coming quarters. Given the weak start, GDP growth should be around 2.7% in 2015.

 

Other US data solid, suggesting improvement ahead

Other reports released yesterday, including the Conference Board’s consumer confidence index for May showed that sentiment remains firm. The index edged up to 95.4 from 95.2. According to this survey, consumers’ outlook for the labour market improved. Separately, new home sales in the US increased by 6.8% in April, up from -10% the previous month. Meanwhile, the S&P Case Schiller home price index increased slightly in March by 0.95%, from a February gain which was revised up by 0.3pp to 1.2%. Over the past year the home price index rose by 5%.  Higher home prices are a result of a housing market that is gradually recovering. The increasing demand for housing should boost construction and support residential investment in the coming time.

 

The dollar rally is gaining momentum

Investor sentiment towards the US dollar has improved significantly over the recent days. The higher-than-expected US consumer inflation data published last Friday has resulted in some upward adjustments in US fed rate hike expectations this year and next. This was reflected in a few basis points increase in the Fed Funds futures and Eurodollar futures for December 2015 and 2016. In addition, investors according to some measures,  on average expect less than 7 months before the first Fed rate hike, which was more than 9 months some weeks ago. The US dollar has appreciated, while financial markets adjusted their expectations (see graph above). USD/JPY has even set a new high since 2007. It is likely that the Fed will start the hiking cycle in September and will hike at a faster pace than financial markets currently anticipate. Later this week, the second estimate of US GDP will be released. Expectations are for a 0.9% drop in Q1 compared to the 0.2% rise for the first estimate. We are not as negative as current market consensus, so there is room for the US dollar to rally.