US GDP Disappoints Sending Dollar Lower

US GDP – Still A Bit Of A Soft Patch

US GDP: Still A Bit Of A Soft Patch – Today

Well both U.S. party conventions are over, now for the months of campaigning. Can’t wait. Futures are a little lower this morning after GDP came in on the soft side. Interesting the bond market isn’t reacting much. The US dollar is lower, except against our dollar given Canada GDP was even weaker. Also worth noting, oil is down this morning despite a weaker US dollar, that can’t be good.

Japan yen up big

A wild overnight in Japan, just look at the 24 hour chart above to get an idea how markets reacted to the Bank of Japan. The yen is up this morning and bonds are down (yields up) after the Bank of Japan only gave a modest boost to stimulus. This was a huge disappointment for the markets and the yen is up 2% against the U.S. dollar. With my trip on the horizon, I’m sure it will simply go up until October. They have announced fiscal stimulus as well, although details still pending. This is becoming a theme in many countries that are starting to back off the austerity and look to see if good old fashion G can help foster economic growth. Oh, G = Government Spending in the calculation for GDP. Let’s see if eco memory is good, I believe GDP = C + I + G + (X-M). C is consumer spending, I is net business investment, G is government and X-M is exports minus imports.

GDP Misses abound

GDP misses seem to be the theme today. We have seen the Eurozone come out with 0.3% growth in Q2, down from 0.6% in Q1. This is Q2 so largely before the Brexit vote. In the US we see a 1.2% growth in Q2, missing the 2.5% consensus. The US is annualized, so to make apple to apples, short cut is to multiply Eurozone x4. So it was a tie. What wasn’t a tie was Canada GDP which shrank 0.6% in May. Our quarterly comes out later, probably due to economists spending time at cottages.

A report card nobody wants to see

At 4pm today we get should see a report from the European banking authority on a type of stress test for the region. No grades but should provide some guidance on how much some banks need to raise in the capital markets to be less stressed. Italian banks, that are a complete mess, will be of particular interest from the market’s perspective.

Diversion – ok the usual diversion contributors are all missing today, so how about this one:

Long Shot

Company News

Merck beat expectations with their second quarter results. Sales of their blockbuster diabetes drug and a new cancer treatment helped boost profits. Their arthritis division saw sales fall by $339mm. Canopy Growth, Canada’s largest legal marijuana grower is looking for a loan to expand operations. They need the cash to expand operations internationally. They already have business ventures in Germany, Australia and Brazil. UBS and Barclays are bother higher this morning after cost cutting efforts helped boost quarterly profits. The immediate lack of disruption from the Brexit vote is helping ease investor fears surrounding two of Europe’s largest banks. Air Canada reported a strong quarterly earnings report as low fuel cost continue to help boost profits.

Commodities

Oil prices are on the brink of a bear market, trading below $41 a barrel this morning. Inventories are running at or near full capacity, and particularly high for gasoline as drivers are commuting to get through the buildup. A resurgence of U.S. production is adding to the problem at the same time global supply disruptions in Canada and Nigeria seem to be abating. Gold futures are up over $10 an ounce this morning heading for their second straight weekly gain. A weaker dollar and slowing U.S. GDP growth have helped provide a tailwind this week.

Fixed Income And Economics

A heavy data calendar Friday is highlighted by the first reading of Q2 U.S. GDP coming in at an annualized pace of +1.2% — well short of the +2.5% consensus. Weaker inventories and a really wide trade deficit are being blamed for the miss by the media but big drops were seen pretty much everywhere. Gross private investment fell by -9.7% with the fixed component falling by the most in a year. Government consumption dropped by -0.9% (lowest in two years) that took some of the shine off the +4.2% pick up in personal spending. The U.S. trade gap widened by -3.6% to $63.3 billion. We’re not going to take too much away from the overall report since it’s going to be revised two more times but the headline number does not bode well for the quarter. Manufacturing sentiment in the form of the Chicago PMI and general market condition readings via the University of Michigan confidence readings are both out after the equity open. In Canada, Ottawa has unveiled a GDP update of their own with May output falling by -0.6% to miss the consensus of -0.5%. That dropped annualized GDP to just +1.0% — down 0.5 percentage points from April and the slowest pace since December 2015. Details were weak all around with goods-producers down -2.8% as mining/quarrying (-6.4%) highlighted the laggards. The always important manufacturing segment was down -2.4% to mark the fourth month in five that it shrank.

Another day and another multi-month low for WTI that at time of writing was trading at its intraday low of $40.57 per barrel. Supply concerns from the past few weeks (exacerbated by consecutive releases of rising rig counts) aside, you can bet that the chart technicians will be out in full force today as the current price sits just under the 200 day moving average of $40.70 — a close below this and the next support would be in the $35.00 range. The low price of oil has negative implications for us Canadians in two ways beginning with the loonie. Despite the deterioration in the spot price of WTI, our dollar has been surprisingly resilient with the USD/CAD cross trading in a fairly tight five penny range since early May. For the session, we’re actually unchanged at 1.3166 as the drop in oil is being countered by general weakness in the greenback (you can thank the BoJ for this). With hawkish overtones coming out of the Fed on Wednesday though, the loonie’s future path is likely lower in the near term. The second concern from lower oil is its impact on corporate bonds, specifically in the high yield segment. We have noticed that the latter has been barely changed in the domestic market as record high equity indices have helped buttress the plight in energy. One has to wonder how much longer this will hold though as many Canadian producers are in the red when oil is below $40 per barrel.