Forexbegin.Net

Previous session overview

The dollar slipped against the yen in morning trading Friday after U.S. gross domestic product data showed scant signs of inflationary pressure, putting downward pressure on U.S. yields.

GDP in the U.S. grew by 2.4% in the second quarter, slightly below the 2.5% expected by economists.

Yields slumped after investors reacted with despair to a downturn in U.S. second quarter GDP. The response might not have been so bad had St. Louis Fed chief Bullard not pulled out a paper discussing a contingency plan in the event deflation became a threat. The timing of Mr. Bullard's paper seems to have had some negative implication for today's 2.4% reported growth rate despite a conviction that current quarter growth will rebound to 3% and despite the ongoing stream of evidence from companies reporting killer earnings. An earlier triple-digit slide in the Dow industrials index is fast eroding.

Today's GDP data is another piece of data that underwhelmed, and adds to the string of releases casting a long shadow over the US recovery. It's a good snapshot of where the economy is right now as it showed that consumer spending is adding less to growth, while business spending on investment actually picked up. It therefore shows the contrast between companies that may be seeing better revenue and potential profits, but that is not translating to more jobs and confident consumers willing to take on purchases.

The first estimate of second-quarter 2010 GDP growth showed a 2.4% annualized gain, just short of expectations for a 2.6% annualized increase. Revisions to the data going back to 2007 showed a generally softer economic performance with 2007 growth at 1.9% (compared to 2.1%), 2008 flat (compared to previously reported gain of 0.4%) and a -2.6% drop in 2009 from -2.4%. The data revisions confirmed that the peak-to-trough decline in real GDP output was -4.1%, larger than the previously reported -3.8%.

GDP output in May grew moderately weaker than anticipated rising 0.1% compared to market expectations of a 0.2% rise. This result represents a modest improvement from the no change in April although down markedly from the 0.6% surge recorded in March. The strength emanated from the goods-producing side of the economy where activity rose 0.6%, which more than offset the -0.1% decline in the larger service-producing component of the economy.

Real GDP grew at a 2.4 percent pace in the second quarter. Most of the strength was in the early part of the quarter and the economy is thought to have lost momentum more recently.

Less Strength Than Meets The Eye

Real GDP grew at a respectable 2.4 percent pace during the second quarter, which was precisely in line with our forecast.

Real GDP for Q2 came in at 2.4% (annualized), which was near expectations of 2.6%. However, the real story was in the annual revisions. Although Q1-2010 was revised up a full percentage point to 3.7%, this was because the level of GDP had dropped for the prior quarters on downward revisions that resulted in a slightly deeper recession, with a peak-to-trough of -4.1% (instead of -3.8%)

Canadian real GDP rose 0.1% in May, an improvement from April's flat reading, but still well below the strong gains experienced during the heydays of the recovery. And, on a three-month moving average economic growth has decelerated from a peak of 0.5% in March, to just 0.2% in May.

The goods producing sector helped drive growth, while services contracted for a second consecutive month.

The end of July has traders on edge after a month of remarkable weakness for the dollar, while they cautiously await August PMI data due next week for the latest health check on the state of economic health. Comments from St. Louis Fed President James Bullard sounded the deflationary bell once more causing a further flow of refugees into the Japanese yen, which raced to its highest level for 2010 at ¥86.16. The yen rose against the euro, which also looks set to close the month with a substantial eight cent gain against the dollar.

Asia Pacific markets were lower after a lackluster performance in US equities saw the Dow, the S&P, and the Nasdaq fall by .3%, .4%, and .6% respectively. Disappointing topline revenues and softer guidance reports weighed on sentiment one day before the US is set to release Q2 GDP figures. Remarks made by Federal Reserve Bank of St. Louis President James Bullard also helped subdue risk appetite after he suggested that the US is moving closer to Japanese-style deflation and may need additional quantitative easing measures.