US records GDP growth but concerns remain

Despite surprising on the upside, the composition of US Q4 GDP growth may point to emerging underlying weakness in the economy. The US economy expanded at annualized rate of 2.9% in Q4 2022, slightly above market expectations of 2.6%, but below the 3.2% q/q annualised pace of growth achieved in Q3. This quarterly result means that the US economy grew by 2.1% for 2022 as a whole. Growth in Q4 was in large part driven by inventories and personal consumption. Growth in the latter was 2.1% annualized, slightly lower than the 2.3% recorded in Q3. Weaker December retails sales data however suggest that most of that consumption growth would have been from the early part of the quarter, with activity dropping off closer to the end of the year. Residential investment acted as a drag on growth in the quarter, plunging by -26.7% on an annualised basis, reflecting the impact of last year’s cumulative Fed rate rises on the housing market. The Fed is still expected to raise rates by 25bps, when it meets next week, taking the upper bound to 4.75%.

Initial jobless claims dropped to 186K in the week ending 21 January, lower than the 192k recorded the week prior. There have been some suggestions that companies may be hoarding labour for the moment, with those that had previously struggled to fill vacancies possibly being hesitant to let workers go until absolutely necessary. Continuing jobless claims, which reflects claims made by individuals already claiming unemployment benefits, did tick up to 1675K in the week ending 14 January from 1655K the week before. This level is however still below the pre-pandemic average.

Durable goods orders rose 5.6% m/m in December, better than expectations for a 2.5% m/m rise. Although it is worth noting that this was entirely due to the impact of a very strong month for Boeing. Stripping out transportation, durable goods orders actually fell -0.1%m/m. 

Today’s key economic data and events

• 17:30 US personal income Dec: forecast 0.2%
• 17:30 US personal spending Dec: forecast -0.1%

Fixed Income

• US Treasury markets tumbled overnight as investor mood shifted toward equities and a better than expected durables good print for December may have raised the prospect of hawkish Fed action. Yields on the 2yr UST added 6bps 4.1826% while the 10yr yield rose by 5bps to 3.4947%. Market direction may be a bit listless until the end of the FOMC next week.
• European markets also dropped with bund yields adding 6bps to 2.203% and French 10yrs up 8bps at 2.669%. Gilt yields also jumped by about 8bps to 3.314%.
• S&P affirmed their long-term rating on Egypt at ‘B’ with a stable outlook. The rating firm noted “multilateral and bilateral financial support” will help meet Egypt’s financing needs.

FX

• Currency markets endured a choppy day of trading overnight with the US dollar managing some modest gains against major peers. EURUSD dropped by 0.2% to 1.0892 while GBPUSD held flat at around 1.2408. USDJPY jumped by 0.5% to 130.22.
• Commodity currencies were the relative outperformers with all gaining against the dollar overnight. USDCAD fell by 0.5% to 1.3321 while AUDUSD and NZDUSD both gained 0.2% to 0.7155 and 0.6489 respectively.

Equities

• As Asian markets reopened from the Lunar New Year holiday they largely reflected the bullishness seen elsewhere this week, as the Hang Seng Index added 2.4% compared with its previous close last Friday.
• US equities had another strong day as the GDP growth print raised hopes for a soft landing. The Dow Jones, S&P 500, and the NASDAQ added 0.6%, 1.1% and 1.8% respectively.
• Locally, the DFM closed flat but the ADX ended the day down 1.7%.

Commodities

• Oil prices ended the day higher overnight with Brent futures up by 1.6% at USD 87.47/b and WTI adding 1.1% to USD 81.01/b. The EU is reportedly considering to impose a price cap of an equivalent USD 100/b on exports of Russian refined products. Current diesel futures for north-west Europe delivery are trading about USD 130/b.
• The OPEC president, Gabriel Mbaga Obianga Lima, noted that the exporters’ alliance needed to be “careful” on assessing production plans. Obianga Lima holds the rotating OPEC presidency.

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