Talking The Talk
Those looking for the US Q2 GDP report to cement the case for further Fed easing on August 1 were disappointed by the 1.5% headline real GDP growth print. To be sure, this was largely as expected, with slower consumer spending growth (to 1.5% from 2.4%) countered by improvements in equipment and software spending (to 7.2% from 5.4%) and exports (to 5.3% from 4.4%). Inventories also picked up, and we still see downside risks to our 2.5% growth assumption for H2. The revisions offered no fresh guidance – Q1 growth was raised modestly to 2.0% from 1.9%;. 2011 was raised 0.1pp to 1.8%; 2010 down 0.6pp to 2.4%; and 2009 up 0.4pp to -3.1%. However, in a market already positioned for slower US growth, the key point to stress is that there were no major negative surprises that would convincingly skew the risks towards Fed easing as early as next week. EURUSD dipped briefly in response, only to be bought back on a joint statement from Merkel-Hollande saying they were prepared “to do everything” to protect the single currency and reports that Draghi will meet with the Bundesbank’s Weidmann soon to discuss such options as a rate cut, bond buying, a new LTRO, and the provision of a banking license for the ESM in the longer term. With the ECB meeting looming on August 2, this has magnified hopes for bolder policy action, most notably purchases of Spanish and Italian debt by the central bank either as an agent of the EFSF (as flagged in Le Monde) or via the SMP. The former would still require Eurogroup approval, yet could come with a loss guarantee for the ECB. Through all the (often conflicting) headlines, the euro may continue to ride on the back of what appears to be a growing sense of urgency from the Eurozone policy authorities. That said, there is a risk that the euro bulls get ahead of themselves, setting up an opportunity to fade the bounce post-ECB.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank