Fundamental Update: How to digest confusing economic signals from the US

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By Kathleen Brooks | January 31, 2013 3:10 AM EST

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No one saw that coming. The 0.1% decline in Q4 2012 GDP in the US was much worse than the 1.1% expansion the market had expected, added to that it came hot on the heels of yesterday's consumer confidence disappointment, which dropped to its lowest level in more than a year. The problem for traders is that the economic data in the last 24 hours has been confusing, contradictory and thus difficult to get a grip on.

Finding the root of the US GDP rot


It's worth digging into the GDP data beyond the headline figure. The decline in growth was mostly down to falls in exports, imports and government spending. Exports fell for the first time in more than 7 quarters. Imports fell 3.2% in Q4 after a 0.6% decline in Q3. The other sharp area of contraction was in government spending. The bulk of the decline was down to a 22% drop in national defence spending, non-defence spending actually rose 1.4%. Due to the relative stances of the Republicans and Democrats on defence spending, if Romney had won the election last November then we may not have seen such a sharp decline, but who knows... However, the 22% decline does not appear such a sharp contraction when you think that national defence spending rose by 12.9% in Q3.

Is the US economy really that weak?


While government spending was weak there was some good news that could help buoy sentiment in stock markets. Consumption rose by 2.2%, the largest increase since Q1, likewise, business investment was higher and there was further evidence that the beleaguered housing sector could be turning a corner after residential investment rose by 15.3%, after a 13.5% boost to residential spending in Q3.

This is a fairly good "bad" GDP reading for the US. Although consumer confidence is weak, consumers are likely to keep spending if the labour market continues to pick up. The ADP employment report was extremely strong, the private sector created 192k jobs vs. expectations of a 165k; this is the largest increase since February 2012. It's good news that the private sector is producing jobs as the public sector is poised to contract and cut spending.

Could payrolls data add to the confusion?


The payrolls data on Friday will give us an indication of the health of the public sector job market. The link between the ADP data and the Bureau of Labor Statistics' NFP data is not that strong. In the last three months there has been on average a 34,000 difference in the two measures of jobs growth, thus today's ADP print does not suggest that the NFP figures will follow the ADP figures higher when they are released at the end of the week.

The BLS NFP data could add to the sense of confusion around the state of the economy. January can be particularly volatile due to temporary hiring by firms before Christmas. Initial jobless claims fell to their lowest level since 2007 last week, however, is this sustainable employment growth or is it just temporary and will the labour market turn around again? Friday's data is likely to be scrutinised and any surprises (to the positive or negative side) could be met with suspicion and volatility by the markets.

Weak data could provide opportunities for bulls


So how should traders react? When the economic data is this mixed and confusing it can be best to stay on the side-lines until the dust settles. There is some good news for bulls, if you still think that US stocks can move higher or that USDJPY has another leg higher, then you may be able to enter fresh long positions at better levels on pullbacks. The market is in profit-taking mode as we lead up to the FOMC later today and the payrolls on Friday. This could lead to some moderate losses. In the SPX 1,480 and then 1,450 should act as good support. Likewise, in USDJPY 91.05 is key short term pivot support, ahead of 90.70 and then 90.30.

Gains in GBP could be capped even with good lending data


Elsewhere, UK lending data provided a bright spot in an otherwise gloomy economic picture for the UK. Consumer lending rose by GBP1 billion at the end of last year and mortgage approvals also rose to their highest level for a year. This surprised on the upside, and the pound has extended gains today. GBPUSD has been in recovery mode the last few days and 1.5680 is now looking like a temporary bottom. However, we think this offers an opportunity to go short.1.5800 is tough short term resistance, which may cap recent gains. Added to that, this cross is starting to look overbought on an hourly basis.

Up, up and away for the euro (for now)


Spanish GDP was weaker than expected, but only by a fraction. The discouraging thing was that the Q4 GDP print of -0.7% was the weakest since Q2 2009. Thus, we need to see recent gains in PMI data continue to boost Spain's prospects for 2013. EURUSD has extended gains above 1.3500, and is running into resistance at 1.3580. This has been a fantastic run for this cross, which opens the way to 1.3750 (as long as the Fed remains dovish in their statement released at 1915GMT).

One to watch: Gold


The yellow metal was a big winner after the GDP data in the US, rising $15 in the hours after the release. It is starting to look extremely overbought, and could run into a brick wall of resistance at $1,685 - the 200-day sma. Above here opens the way for another attempt to break above $1,700. However, since the GDP data may not be as bad as the headline figure suggests, we could see some selling pressure as we approach $1,685. Near term support is $1,650 - the bottom of the recent range.

Figure 1: Gold daily chat



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

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