NEWS / Foreign Exchange

US: Weak Q1 GDP, but encouraging other data

Q1 2007 GDP growth was revised down to 0.6% from 1.3% initially. This was slightly below the consensus estimate. The downward revisions were due to inventories and net exports, while consumption was revised higher. The GDP deflator was left unrevised. For Q2, there will be a shift in the composition of GDP, as consumption spending will probably slow quite substantially, but business investment and inventory build-up might be an offsetting factor. Indeed, the downward revision of inventory investment suggest that firms might now start to replenish the shelves and this might also impact the business confidence data like the ISM today.

Initial claims fell 4 000 to 310 000 from an upwardly revised 314 000, earlier reported as 311 000. The 4-week average remained very low at 304 500. Continuing claims dropped 53 000, erasing exactly the increase in the previous week. We still think that the claims are distorted.

The Chicago PMI rebounded sharply in May, effectively erasing April??™s decline. The headline index surged to 61.7 from 52.9 in the previous month. New orders, production and employment all posted strong gains. Also the price index jumped higher (70.2). At face value the report suggest that the economy is sharply recovering. While this may be the case we would like to see such recovery in more reliable indicators. This afternoon, the ISM might already give us some answers.

Construction spending rose by 0.1% M/M in April, following an upwardly revised 0.6% M/M in March, earlier reported at +0.2% M/M. On a yearly basis, spending is down 2%. Private residential spending fell 1% M/M, identical to March, but nonresidential spending rose by 1.5% M/M and public spending by 0.7% M/M. While residential spending continued to decline in recent months, the pace of decline seem to slow down.

EMU: Economic sentiment improves

Economic sentiment improved in May according to an EU survey. The headline index rose to 111.9 from 111 previously, beating consensus for an unchanged figure. Looking to the details sentiment deteriorated slightly in the industrial, services and retail sector, but improved in retail and especially among consumers. Especially in France, consumer confidence improved, probably due to the election of a new president.

HICP inflation stabilized at 1.9% Y/Y in May, according to the flash estimate. More details will only be available in the final report.

Other: UK mortgage lending slows

In April, the increase in total net lending to individuals slowed to GBP 9.4 B compared to 10.1 B in the previous month. The slowing was mainly due to the smaller increase in net lending secured on dwellings (8.9 B vs. 9.4 B), while the increase in net consumer credit remains very low (0.5 B vs. 0.7 B). The number of mortgage approvals declined to 107K in April compared to 112K in March and is currently at its lowest level since April 2006, when it was the same. The deceleration in credit growth and lower mortgage approvals suggests that higher interest rates are slowing down the housing market. This may also have an impact on consumer spending further out, even while consumer confidence surprisingly rose to ??“2 in May from ??“6 in April.

The CBI distributive trades report showed the sales balance at 31 in May, the sixth consecutive month of growth, although it was lower than April??™s three year high (44). The price component, which has gained importance as the MPC has called increased pricing power as a major inflation risk, rose a to a 9-year high at 33 and even while it is expected to fall back to 23 next month, this will raise the inflation concerns at the Bank of England.