Macro Commentary
No-flation is better than deflation, or so it goes in the Eurozone. After a string of price drops, the inflation reading for the economic block registered at zero – a sign that recent quantitative easing is having some effect. It is still a far cry from the 2% stated goal, but the market hopes that a data point does a trend make. Meanwhile, despite the ongoing Greek saga, the EUR/USD has bounced back from recent lows. It was aided this week no doubt by the missive from the US Federal Reserve which caused many market participants to extend out their forecast for when the first rate increase will occur. Granted, it feels like investors put too much weight on the specific words in a press release, but the note from the Fed said that the Committee sees “the risks to the outlook for economic activity and the labor market as nearly balanced” [emphasis mine]. Nearly balanced is not balanced, or so one of our independent research shops remarked after reading the comments. It was not a surprise to us; we have said time and again that the Yellen-led Fed wants to see the data of why they need to raise rates in the rear-view mirror.
And the data is not yet in the rear-view yet. In fact, the preliminary release of US GDP in the first quarter came out at 0.2%, well below the average 1% expectation by most economists. As we stated in our recent quarterly Outlook, we expected the first quarter growth number to be roughly flat – guided by the Atlanta Federal Reserve Bank’s own real-time monitor called GDPNow. We also believe this lower-than-expected growth to be transitory. As the year progresses, we will see ongoing modest growth in the US, likely some improvement in wages, and the release of downward pressure on US inflation readings caused by energy prices (which have fallen and are slowly on their way back up). Yellen may be seeing enough road behind her in the rear-view by year-end.