The US dollar briefly jumped on a strong GDP headline but almost instantly gave up the gains. Why?

USDJPY after GDP

USDJPY exemplifies the USD move

The GDP report showed 3.5% growth compared to 3.0% expected but the internals of the report weren’t as rosy. Two of the major drivers were government spending and trade.

Government spending, mostly on defense, added 0.83 pp to GDP and that’s not the kind of sustainable growth the market wants to see.

Trade is generally a good thing but the market is skeptical on the lack of imports.

Exports of goods increased 11% q/q but imports were down 2.4% q/q. A growing economy generally imports although more US oil production might be the reason because it means less imported oil.

On the negative side, the market would have liked to see more life from the consumer. Personal consumption rose 1.8% compared to 2.5% in Q2 but it was only modestly lower than the 1.9% consensus.

Private investment is also on the soft side, adding just 0.17 pp to GDP but that’s not hugely surprising after the 2.87 pp boost to Q2.

I think people poking holes in the internals might be missing something and it’s reflective of the change in the FOMC statement.

The market (and the Fed) has shifted the focus to inflation. The PCE price index in the report climbed just 1.3% y/y — nowhere near fast enough to get the Fed’s attention and below the 1.4% expected.

The bond market hasn’t exactly cheered the Fed statement, especially the long end. US 10-year yields stalled out at the 61.8% retracement of the Sept-Oct fall just before it was published. Perhaps more importantly, 10-year breakevens are at just 1.89%.

US 10 year yields

US 10 year yields