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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 28 July 2017 at 5:01 GMT

3 Numbers: After a weak Q1, US to bounce back to trend growth in Q2

Blogger / MoreLiver's Daily
Finland
  • EU July Business and Consumer survey at pre-crisis highs – but will it last?
  • US Q2 GDP should confirm a continuation of 2% trend growth
  • US consumer sentiment dipped in mid-July, so end-of-month data is interesting
  • The economic surprise indices for the US and the Eurozone are still wide apart

By Juhani Huopainen

It will be a busy day on the data front. For traders, the European Union’s Business and Consumer Survey will probably be the most important event, although the first estimate of the US gross domestic production growth during the second quarter of 2017 will capture most attention.
France and Spain are the first euro countries to report the first estimate of the GDP growth.

Stocks have been weakish all week, but no proper selloff has happened since last Monday's selling panic. Maybe the market is getting ready to make its next move after resting on its laurels after Monday? 

In the forex space, the EURUSD's zig-zagging rally higher has continued all week, and today will begin with the pair closer to the rising channel's bottom. I'd be looking to trade breakouts in stocks, and long EURUSD – at least until the rising channel is violated.


vcvc
 The US looks like it has left behind the temporary slowdown seen in the first quarter, with the median forecast of 2.7% GDP growth for Q2. Photo: Shutterstock

Eurozone July Business and Consumer Survey (0900 GMT). The Economic Sentiment Index (ESI) for the whole euro area is expected to drop slightly to 110.9 from 111.1 in June. The expected fall of only 0.2 index points would be just a fraction of the 1.2 point increase seen in June.

The June reading was the highest since August 2007 – right before the great financial crisis begun. The stock markets have tended to move together with the sentiment index. As sentiment improves, so do the stock prices. This implies that longer-term, it makes sense to look at whether the sentiment index is close to historical highs, with little apparent room to improve.

ESI Dax
Source: Saxo Bank

The longer chart shows that sentiment tends to be very high right before a bigger crisis starts. This suggests there might be something lurking there in the dark that is not yet apparent to most market observers.

ESI DAX longer
Source: Saxo Bank

The Markit Composite Purchasing Managers' Index peaked in May, and has been declining for a couple of months now. Longer-term, the ESI and the Markit’s PMI tend to move hand-in-hand, so this divergence should be resolved soon. Note that the Markit flash PMI for July has already been released, and it had decreased again.

This suggests that either the Markit’s PMI is not fully reflecting the current optimism, or the ESI is way too optimistic at the moment. I’d be watching out for a possible negative surprise today, which would be negative for the stock market.

ESI and PMI
Source: Saxo Bank

The economic surprise indices of the US and the euro area are still wide apart, although the divergence has recently started to close as the European data has had trouble meeting the higher expectations. The Business and Consumer Survey data can be downloaded here.

US Q2 Gross Domestic Production (1230 GMT). The median forecast for US GDP growth during the second quarter is 2.7% (the seasonally adjusted annualised rate). The growth in the first quarter was very weak at only 1.4%, but in recent years this is very common and weakness during the first quarter is widely believed to be transitory.

The Federal Reserve Bank of Atlanta’s GDPNow-model’s final forecast is 2.8%, though only a couple of days back it had settled around 2.5%–2.6% for several weeks.

GDPNow
Source: Federal Reserve

The average trend growth of the past couple of years has been just a little bit above 2%. The quarterly deviations from that have not changed this picture, though of course they are often met with the intriguing change of either accelerating trend growth or an impending recession. 

Investors with a longer time horizon should try to avoid chasing the latest quarterly swings or trade against them.

US GDP
Source: Saxo Bank

US July U.Michigan Consumer Sentiment (1400 GMT). The mid-July consumer sentiment index tumbled hard, even though it was expected to remain practically unchanged. The consensus forecast is no change to the mid-month estimate.

US CS
Source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more 

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.

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