U.S. 2nd Quarter GDP came in this morning better than the
street expected and underlined the fact that the U.S. economy was
temporarily derailed by an intense winter across the country.
GDP came in at 4.0% versus 3% expectations as Gross domestic
purchases came in 4.5% vs -0.4 prior. At this point the first
half growth story in the U.S. is trending where it was supposed
to with a rate of roughly 2.1%.
Exports and Inventories, the two places of extreme weakness
last quarter revered field. Add these numbers to the current
trajectory of 3Q and the expectation of 4Q and you have a full
picture that is much more emphatic on a few themes that the Fed
must address and may be doing so right now as they wrap up their
Ultimately all this sets the stage for U.S. Dollar Bulls.
Rates are too low and the U.S. macro differentials to the G3 are
alarming. While the size of the Fed balance sheet is the reason
the Euro has held in (while they actually shrink theirs)
ultimately it is about relative contraction that will take place
in the U.S. and it will be huge.
We think this is an important theme. There are pluses and
minuses. Pro cyclical growth which will help miners, industrial
metals, and even shippers.
The negative is for multinationals who may benefit from the
growth but also will see a currency headwind to their overseas
efforts. Recently multinationals have been outperformers in
earnings season on the strength of their growth economies
exposure and also the weakness of the U.S. Dollar as they
repatriate their foreign earnings (those who do!).
For now the trade is to be adding to the DXY which you can do
via ETFs such the Power Shares DB US Dollar Index (
) that replicate the up or down movements of the U.S. Dollar
Basket. We also believe that rates while range bound are too low
and will recalibrate on these macro releases to the 2.75-2.85%
area on the 10yr.