Last week, the United States Federal Reserve reduced its Quantitative Easing programme by $10bn. This marks the fourth cut since December, reducing the asset purchase scheme to $45bn, unlike previous months the dollar did not rally against its major counterparts. The Dollar Index started the week at 79.73 only to drift lower to close at 79.50. The drop in the dollar was attributed to disappointing US first quarter GDP data that only grew by 0.1 percent annualised rate from January through March. However upbeat unemployment report, consumer spending and industrial production that came out later in the week suggested that the first quarter’s 0.1 percent annual growth pace was an aberration and is not a reflection of the economy’s otherwise solid fundamentals.
On to Europe, the financial markets had mixed views on whether or not the European Central bank would implement a quantitative easing program to combat low inflation levels. Some economists expect the European Central Bank to follow other major Central Banks and implement a Quantitative Easing Program, but other analyst say it is not clear that the Eurozone has a serious deflation problem that would prompt a QE programme.
Early last week, the rose to a two-week high of 1.3889 against the dollar, aided by expectations that the inflation in the eurozone will pick up and ease pressure on the European Central Bank to implement a QE programme to avoid the risk of deflation. Later in the week and after having lower than expected April price growth of 0.7 percent, initially sent the euro to a three-week low of 1.3775 against the dollar, the euro later recovered and closed for the week at 1.3870.
The dollar rallied against the yen, after a 0.4 percent drop in the unemployment levels, which came in at 6.3 percent the lowest level since September 2008. The dollar reach a high of 103.02 against the Japanese yen, but later lost steam and fell back again to 102,18 after the US jobs reports showed a drop in the labour participation rate, a reflection of increasing numbers of Americans ending job hunting, and flat wage increases.
The Sterling Pound rallied to 1.6918 marking a four and a half year high against the dollar, the strength in the pound was due robust GDP and construction PMI data.
US GDP grew at a 0.1 percent annualised rate from January through March, compared with a 2.6 percent gain in the fourth quarter 2013. The GDP data came well below market expectation of a 1.2 percent. The deceleration in real GDP growth in the first quarter 2014 reflected downturns in exports and in nonresidential fixed investment, a larger decrease in private inventory investment, a deceleration in personal consumption expenditures, and a downturn in state and local government spending.
The Federal Open market Committee announced they would reduce its bond purchases by another $10bn. The decision came despite weaker than expected GDP data. The FOMC said in a statement following a meeting in Washington, “Household spending appears to be rising more quickly.” The committee pared monthly asset buying to $45bn, its fourth straight $10bn cut, and said further reductions in “measured steps” are likely.
US consumer confidence dropped slightly in April but remained near the 2008 highs, suggesting that the US economy continued to regain momentum after the unusually cold and snowy winter that disrupted economic activity early in the year. The Conference Board said its index of consumer attitudes dropped to 82.3, the second-highest reading since January 2008. The director of economic indicators said in a statement, “While sentiment regarding current conditions may have slipped a bit, consumers do not foresee the economy, or the labour market, losing the momentum that has been building up over the past several months.”
Eurozone Consumer Price Inflation rose in April, reducing chances the ECB will act soon to fend off the risk of deflation but the rate of price improvement was below forecast and still within the ECB’s “danger zone” of under one percent. The CPI improved slightly in April to 0.7 percent from March’s 0.5 percent, which marked the lowest level since 2009. However, the reading was below market forecast of 0.8 percent rise, despite increased spending over the Easter period, reflecting the poor state of the eurozone economies.
German consumer prices harmonized with other EU countries increased 1.1 percent on the year in April although they fell 0.3 percent on the month. The weaker German inflation raised hope that the ECB might be closer to doing something “accommodation-wise” other than just talk, which in turn could send the euro lower. Indeed, German CPI for April at 1.3 percent y-o-y did not bounce back as strongly as expected.
United Kingdom’s economy grew at its fastest pace in more than six years, but the economy is still smaller than its peak before the 2008-09 recessions, underscoring why the Bank of England has said it will not be raising interest. The Gross domestic product rose a quarterly 0.8 percent slightly missing expectation of a 0.9 percent rise. There were also signs of a broader recovery as manufacturing sector improved. Bank of England Governor Mark Carney was quoted as saying in a newspaper interview published last week that the economic recovery is starting to broaden and there are early signs that it will be sustainable.
Japans inflation rate rose to a 22 year high in April, an early sign that companies are making progress in passing on a new tax increase to customers as policy makers seek to pull Japan out of years of deflation. Tokyo’s core consumer prices rose 2.7 percent from a year earlier. However, given the gradual pace of the pickup in the Japanese economy, expectations remain that the BOJ will have to do more and would most likely will ease policy again in June or July.
The Peninsula
