- The US GDP figure for the first quarter fell short of forecasts and was the weakest pace of growth in 3 years
- Despite the tepid reading for the world's largest economy, neither the Dollar nor the S&P 500 seemed too trouble
- Big-picture economic measures certainly matter; but their market influence depends on certain practical factors
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Do fundamentals matter? It is a common enough question, regularly raised when a seemingly significant development from the economic backdrop is barely regsitered by the markets. This past week's 1Q GDP release was the perfect example of this confusion - especially against a growing belief that the Dollar and US equities face an inflection point in conviction (trend in another name). It struck many as remarkable or even improbable that the slowest pace of growth for the world's largest economy While a data print or event may not generate a major break or progressive trend, that doesn't mean it doesn't carry weight which will factor into direction sometime in the future. Again, the US growth update this past week plays an ideal example of that reality.
There are a number of qualifying measures that come into play when shaping a market's reaction to event risk. One of the most frequently forgotten aspects of the currency market is that value is interpretted on a relative basis. For example, the Dollar is most often quoted in terms of the Euro. That carries a very practical consideration of fundamentals. A tepid GDP reading from the US may still lift the US currency and assets if its counterparts face significatly weaker economic readings. Another frequent conflict in the data is the skew that arises from market speculation. There are many measures to gauge anticipation - Fed Fund futures, economist concensus forecast, derivatives - but one that has proven especially interesting for GDP is the economic surprise indicator from Citi. The dive from this aggregate indicator the past weeks offered a distinct lead-in to the weak official number.
Arguably, the most common complicating factor behind a market's unusual or neutral response to key event risk is the ever-changing backdrop of what themes matter most to the markets at large. While health of the world's largest economy accounts for a lot economically and financially, speculative appetites have deviated from their traditional measures of value. Instead of looking for the strong growth with revenue and income that come along with it, traders recently have placed greater interest on low volatility (complacency) and slight yield advantages. Monetary policy extremes, growing trade threats and more can crowd out traditional drivers. That said, the foundations of the markets and economy are built on such slow-moving but critical updates. In this Strategy Video, we discuss how and why measures like the US GDP reading are far more important than the first drive of volatility following the update would imply.
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