Not everyone is dovish in the E.U.

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The ECB’s decision to cut interest rates, on June 5th, helped push the notion that monetary stimulus has yet to become a thing of the past, and that the only monetary tone at the European Union is a dovish one. The dovish approach is willing to stimulate the economy through accommodative monetary policy, even at the expense of the risk of inflating a financial bubble or two. It also made global central banks, such as the Fed, more cautious in regards with dispersing hawkish forward guidance. Evidently, with the ever-more-important role monetary policy took in shaping economic activity in recent years, comments going against the stream are prone to be retorted with a violent capital market response. This premise, however, was countered last Thursday by Bank of England Governor Mark Carney, who delivered a rather hawkish speech At the Lord Mayor’s Banquet for Bankers and Merchants of the City of London. In his speech, Carney mentioned strong indicators regarding the United Kingdom’s economy, such as the Bank of England’s staff projection of an annualized 4% increase of GDP. On the other hand, Carney described the economy as "over-levered" and its housing market as having a potential to "overheat". Additionally, the weak Sterling was insinuated to lead current deficit to a record level. Deeming necessary a remedy to the above situation, Carney moved on to note of "great speculation" regarding the exact timing of the first rate hike. The tone then turned rather hawkish as Carney said that the decision for the first rate hike is becoming "more balanced" and that "it could happen sooner than markets currently expect".

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Economic truths are seldom one-dimensional

Digging into the different subcomponents of the GDP reveals a clearer image. The “inventory” component accounted for most of the negative headline figure, as it alone trimmed no less than 1.6% of it, after chipping off a mere 0.6% in the original estimate. One possible interpretation for this is that businesses expected muted future demand, and were de-stocking in order to avoid being left with merchandise. Another interpretation would be that demand was larger than expected at the start of the quarter, and that alone has led to the de-stocking. 

The latter explanation is supported by the fact that the "personal consumption" component has contributed an annualized 2.1% to the product. Naturally, in this case, diminishing stock inventories would need to be filled, leading to an unavoidable increase of future GDP. Also supporting the premise that the negative print was a one-timer was the fact that Government expenditure was revised downwards to chip 0.15% off the nation's product.


The weekly Initial Jobless claims was released at the same time as the GDP. Unlike the GDP, Initial claims indicated increasing demand at the labor market as it saw exactly 300K weekly claims submitted, from a previous print of 326K. The following day even saw the U.S. Bureau of Economic Analysis report of a 0.3% increase in April’s Personal Income. Additional positive indicators published on Friday included the Chicago Business Barometer rising to a level of 65.5 from a previous print of 63.0, as well as the University of Michigan’s Consumer Confidence Index presenting an upbeat print of 82.5, from a previous 81.9. Combining the above with the fact that equity markets traded noticeably higher depicts the fact that economic truths are seldom one-dimensional. 

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The winter’s final backlash

Forecasts for the second estimate of the U.S. Q1 Gross Domestic Product, released last Thursday, were not excessively optimistic. The preliminary estimate for the figure, released on April 30th, saw the U.S. economy expand by an annualized 0.1% during the quarter. However, as the effect of bad weather settled in analysts’ economic models, it dragged their estimation for the second print to a contraction of 0.5%. When the second estimate’s data was actually published, it presented an annualized 1% decrease of GDP. The recent datum marked the first quarter in three years in which the U.S. economy presents a contraction. Surprisingly, the effect the bad news had on the markets was somewhat limited. Expectations of the Fed prolonging its aggressive monetary activity were not evident in the U.S. bond yields, as the 10 year presented little change immediately after the publishing. U.S. equity Markets also exhibited with a rather muted reaction with the NASDAQ clearing the day at a 0.5% gain, and the Dow Jones adding 0.4%. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Economic events of this week

Monday: The Rightmove National Asking Price indicator will be published in the U.K, after surging by 2.6% last month. March’s Machine Orders data will be published in Japan, after those presented a 10.8% annual growth, in the latest figure. Tuesday: The All Industry Activity Index is due in Japan. Analysts expect last month’s 1.1% decrease reverting to a 1.6% increase. April’s Consumer Price Index is due to be released in the U.K. Analysts expect it to continue indicating a below, but close to 2% annual inflation. The Producer Price Index will also be released in the U.K., but analysts see that presenting milder figures. Wednesday: The day will see the BoJ issue a monetary policy statement, followed by Governor Kuroda holding a press conference. Retail Sales data will be released in the U.K. This will be followed by the Eurozone’s Consumer Confidence Index. In the U.S., the Fed will release minutes from April’s meeting. Thursday: The Markit Manufacturing Purchasing Managers’ Index will be published in Japan. China will see the GSBC Manufacturing Purchasing Managers’ Index published. The day will also see PMIs published throughout the Eurozone, namely France, Germany and the Eurozone Aggregate. The U.K will see a preliminary estimation of the first quarter’s GDP being published. In the U.S., the weekly Initial Jobless Claims will be published, after dropping below the critical level of 300K (see above). Further in the U.S., May’s Markit Purchasing Managers’ Index will be published, analysts expect it to increase even higher, from a previous print of 55.4. Also due are Existing Home Sales and the Leading Index. Friday: The day will kick off with the publishing of Germany’s final estimation of the first quarters’ GDP. This will be followed with the IFO Business Survey. In the U.S., April’s New Home Sales figure will be published. Start Trading HERE!