US consumption boom powers growth but dollar may still struggle

The third reading of the Q4 2016 US GDP report saw an upward revision to 2.1% from 1.9% and the detail suggests that the US economy started 2017 on a very strong note. The key takeaways from this final reading of GDP was strong personal consumption, which was revised up to 3.5% for the quarter, another upward revision for corporate profits, which were up 0.5% in the final three months of 2016, and weaker trade data that actually dragged on growth.

The stronger consumption data and better corporate profits goes some way to explain the pick-up in job growth in the US at the start of this year. If corporate profits can continue to rise in 2017 then we could see further strength in the US labour market, which could put more pressure on wage growth and on the Fed to hike interest rates, possibly more than the two rate hikes already anticipated by the Fed’s dot plot.

Imports could prove a headache for Trump

The trade data is more problematic from a political perspective. Imports surged by 9% in Q4 and exports fell by 4.5% at the same time. Stronger personal consumption was likely a key driver of the rise in imports. This poses a quandary for Trump – if his import tax comes into play then this could essentially act as a stealth tax against consumers, which would not be good for his political ratings. Thus, as Trump hashes out his tax plan on Capitol Hill, he may choose to shelve some of his ideas for penalising importers as the economic reality starts to shape Trump’s legislative agenda.

The market reaction

From a market perspective, today’s report is mildly dollar positive, especially on the back of weaker European inflation and Brexit hanging like Damocles’’ sword over the pound and other UK assets. Although US yields rose on the back of this report on Thursday, 10-year yields need to rise above 2.5% to trigger a decent dollar rally. The S&P 500 was a touch higher on the back of this report, as the consumer discretionary sector received a boost from the stronger personal consumption data. We don’t think that today’s report will have much of a long-term impact on the US equity market, as technicals come to the fore. Unless we break above 2,390, the high from mid-March, then this index looks shaky from a technical standpoint.

Although today’s data was strong, the Q4 GDP report was yesterday’s news, the market will only push the dollar and US stocks higher if economic data continues to strengthen as we move into Q2, and if Trump keeps his policy promises.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.