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Fall in Inventories Cause US GDP to Weaken

DMO 28.04.2023 article image.jpg
Miguel A. Rodriguez
Miguel A. Rodriguez
28 April 2023

In the first quarter, US economic growth dropped to an annual pace of 1.1%, showing that the economy is starting to feel the effects of interest rate increases.

Though hiring and consumer spending, the major drivers of growth, were surprisingly robust at the beginning of the year, they have since declined as a result of the Federal Reserve's (Fed) ongoing increase in interest rates intended to calm the economy and limit the rate of inflation. 

In February and March, shoppers reduced their retail purchases. Last month's factory output and home sales both decreased, and the rapid hiring increase gradually slowed. 

The Fed and investors can get a general idea of how well higher interest rates are working by looking at the estimate of GDP for the first quarter of the year provided by the Commerce Department. 

Related Article: Money Flow Index (MFI)

However, the market response was not what is often seen when the GDP number is lower. As a result of this increase in interest rates, bond yields, particularly those at the short end of the curve, increased and the Dollar strengthened. 

The decline in inventory is the primary cause of the GDP decline; if inventories had remained steady, GDP would have increased by more than 2%. Other economic factors are internal demand and the labor market, which although they are slowing down, still show robust numbers. The GDP deflator, which measures price changes, also had an impact and continues to have a significant impact. 

In order to assess the evolution of prices and get a better understanding of what the Fed will do at its next meeting, the Personal Consumption Expenditure (PCE) statistic for the month of March and which will be released today, will be crucial. 

Related Article: Recession 

However, despite the fact that the job market and domestic demand are still strong, most economists anticipate that they will weaken over the course of the year as the restrictive monetary policy takes hold. It is also expected to cause depressing effects on the economy due to credit restrictions resulting from the tension in the banking system. 

Despite this initial response, it is important to remember that the GDP figure has been weaker and is forecast to keep declining. As a result, there is a high likelihood that there won't be any additional rate hikes or that the next one will already be the last, which should keep the Dollar weaker. 

After the GDP figure was announcement, EUR/USD dropped to 1.1000 from 1.1040, but during the session, the pair paused its decline and from a technical standpoint, maintained inside its current uptrend. 

 

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Sources: Bloomberg, Reuters 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books. 

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