US Economy data once again hit by winter storm in the first quarter of 2015, so much so it most likely will have to postpone Fed rate hike till September or the next quarter.

US Economy data once again hit by winter storm in the first quarter of 2015, so much so it was only able to record 0.2% GDP growth and most likely will have to postpone Fed rate hike till September or the next quarter.

US DataUS GDP Growth Rate On Second Quarter of 2012 - First Quarter Of 2015

 

Seasonal Or Fatal?

It was reported yesterday (29/4) that advanced estimate of US GDP softened, fell from 2.2% in the previous quarter to 0.2% in the first quarter of 2015, far below analysts' estimates. The slowdown is reportedly due to the bad winter, worker disputes in the West Coast, cheap oil price, and overtly strong US Dollar. Emerged after weak job data and slowing inflation, the data once again felled expectations on US economy recovery and Fed rate hike.

Fed FOMC statement, out in the same day, also noted this disappointing development. In the circumstances, policy makers did not give out hints about when they are going to hike rates; instead, they erased everything that points to dates. Even so, they are still quite optimistic that growth in the next periods will improve moderately. Consequently, there are still possibility the Fed rate will be hiked in 2015, but it is most probably not in June or mid-year as widely expected before.

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First quarter economic reports often fell short of expectation because of one seasonal cycle, that is: winter. Historically, since 2010, US economy in the first quarter of every year only grew at an average of 0.6%, although it may grew at an average of 2.9% in the next ones.

But the current circumstances where inflation slowed all the way to zero and job market softened has weakened arguments supporting rate hike. As we all know, interest rate hike is part of an effort in mitigating inflation rate and potentially hurt the job market. Therefore, rate hike is not possible when inflations low and job market moderated. In this sense, the Fed needs to see substantial improvement in the job market and signals for inflation to attain the targeted 2% before lifting rates.

 

On Another Note

On another note, the newest US GDP report gave out a number of warning. Consumer spending that spanned two thirds of economic activity only grew 1.9%, lower than 4.4% growth in the previous quarter. It means US economy failed to benefit from cheap oil price although lower oil price have pushes workers out of job and companies to halt some activities. Consumers apparently still hesitant to allocate surpluses due to cheap oil to pay for other goods and services; instead, they chose to increase savings.

Apart from that, exports of goods and services have dropped because of US Dollar appreciation against other currencies. Exports was down 7.2% although it was up 4.5% in the previous quarter. The main cause is probably slowing demands abroad due to global slowdown that met with strong US Dolar, so US products quickly lose some of its competitive edge. 

Nevertheless, the conditions seems better than the first quarter of 2014. At the time, worse winter have seen US economic growth plunged to -2.1%. In the next seasons, the economy grew substantially, underlined the anomalies that usually stemmed from winter setback.

 

Impossible June

Tanweer Akram from Voya Investment Management in Atlanta told LA Times that Fed rate hike looks more like a fourth-quarter event because with low inflations, policy makers will take caution and wait to see if the first quarter was actually only an anomaly.

Similarly, Kathy Lien from BK Asset Management, Bill Gross from Janus Capital Group, and world's biggest money manager BlackRock Inc, also mentioned that Fed rate hike in June is not possible. Gross told Bloomberg, a 25 basis points increase may happen in September or December. BlackRock also saw September rate hike as more likely. While Lien noted, You are living in a fantasy world if you still think the Fed will raise rates in June. With the FOMC meeting behind us, the focus will turn to next week’s non-farm payrolls report. For the dollar to regain momentum, we need to see a major rebound in job growth....  With household incomes rising strongly and consumer sentiment remaining high a rate hike in 2015 remains firmly on the table. However the slowdown in the first quarter will push liftoff out to September as the Fed needs to see the economy recover from its winter blues before raising rates.

Meanwhile, according to Lien, in the time between yesterday's FOMC meeting and the next Nonfarm Payrolls data release next week, USD/JPY will most likely remain confined between 118 and 120 but for EUR/USD that means, 1.13 to 1.08 and for GBP/USD 1.52 and 1.55 before the UK election. We can see that uncertainties around the long-drawn-out Greece debt issue and UK election generally stay on the side of the market, although for the time being Euro and Poundsterling have made good use of US weaknesses to gain some grounds.