GDP Good Enough for the Fed

Today’s advanced release of US Q1 GDP is the best of both worlds for the Fed; sufficiently weak to unveil a new round of asset purchases (positive for stocks & risk appetite) and sufficiently strong to offset any purchases with sales on the short-end of the yield curve (sterilized version a la Operation Twist).

With core personal consumption expenditure index (inflation gauge) regaining the 2% figure at 2.1%, the argument for a sterilized version of purchasing mortgage backed-securities is bolstered further.

The 2.2% GDP was lower than expectations of 2.6% and whisper number of 3.0%, but close enough to trend growth rate of 2.5%. Also on the positive side, personal consumption expenditure rose 2.9%.

Slowing contribution from private domestic investment and private inventories was offset by an improving contribution in net trade, government spending and personal consumption.

Euro resilience to Spain downgrade builds further on softer than expected US GDP.Spanish 10-year yields remain capped below 6.0% despite last night’s S&P downgrade of Spain. Markets require more out-of-the-box catalysts in order to destabilize the EUR/USD below its 1.3100 floor. As long as more FOMC members (more than before) have shifted to keeping low rates until 2014), the euro requires a more destabilizing factor (USD-positive) in order to break below the key floor.

EUR/USD posts its fourth consecutive daily gain, its longest winning streak since late January. Established market expectations of further Fed asset purchases and low rates til 2014 may be sufficient in escalating the next round of risk-on positioning in favour of $1.33s. Yet, the euro’s structural woes remain entrenched in preventing a rise above $1.34.

Gold boosted by renewed expectations of further QE on a knee-jerk reaction to the lower than expected GDP. After bouncing off its important four-year trendline support of 1620 on Wednesday following no change on the FOMC hawkish front, the metal earnestly adds to those gains, eyeing the next target/resistance at 1670, which is the 100 day moving average (failed it in the last two peaks) as well as the trend line resistance, extending from the March high. A daily close 1672-1673 next week could well extend the rally to 1710.

US crude tested the March 1st trendline resistance at 104.80 but appears to fail in regaining it. A close above 104.80 would retarget 106.0 for now. The weekly picture continues to show an inverted Head-&-Shoulder formation, with support (right shoulder) at 98 underpinning renewed momentum towards 114-115.

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