We got preliminary Q3 GDP numbers for the United States yesterday, it was a bit of a disappointment. Economists had forecast a slowdown, to 1.6%, in the pace of growth in Q2 (3.9%), but the number printed at 1.5%. First of all, this data is lagging, and I don’t think many are particularly surprised, after all we’ve spent the last few months talking about how economic activity has deteriorated somewhat. For me, far more impressive has been the US consumer, who has continued to spend at a robust pace, certainly outperforming the rest of the US economy. Bottom line if the US consumer is doing well, the US economy will be ok in my view. Admittedly the US consumer did not do quite as well in Q3 (3.2%), as forecast (3.3%), but these are fine margins, and probably subject to later revision.
Yesterday we also got German CPI data yesterday, which was flat instead of the slightly negative number anticipated by the experts. Couple that with much better than expected industrial production numbers in South Korea, and to my mind we are already starting to get data that increasingly supports my contention that all we have seen in recent months is evidence of some sort of mid-cycle dip. These happen, in life there are no straight lines, things tend to be jagged and imperfect, and that’s ok. This morning’s retail and consumer spending data from Germany and France respectively is not as impressive as one might have hoped for, but I wouldn’t call it disastrous. All in all the macro data over the last 24 hours, particularly the disappointing GDP data from the US, has let the wind out of the sails of the recent dollar rally. I’m not bothered in the least. Lagging data and weak hands make poor bed fellows, and short term positions are clearing out before the trend continuation I expect. As it happens, EUR/USD reached trend-line support and bounced after what looks like a fairly cut and dried five wave impulsive sequence (see chart below), a correction towards 1.1120, 1.12 or even as far as 1.1260 would not be a surprise at this point. It’s what will happen after this bounce which will seal the deal for me. An aggressive fall in EUR/USD will start to really look like the greenback is regaining its lost momentum.
I’ll finish with a few titbits about China. President Xi has been doing the rounds in Europe, as I’m sure everyone knows by now. Recently in Germany a deal has been agreed to set up an exchange where renminbi denominated products. Whether this is Germany cosying up to China, or China promoting the use of their currency (they launched agreements in the UK that will enable London to become a main base for renminbi trading), the effect is the same. The question remains though, when will that currency become fully convertible? We are probably still years away from that. The other, far more momentous piece of news, is that the Middle Kingdom is scrapping its one child policy. The demographic damage done over the last 3 decades probably means that while population decline is likely to be slowed at the margin, the socio-economic changes that have happened to China in recent years probably means that the impact will be far less than desired. I don’t imagine a lot of young aspiring Chinese women will all of a sudden discard their career plans over this! And also bear in mind that the policy was less strictly adhered to far away in the Chinese countryside. Still it’s big news..
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