SCOREBOARD: Inflating America

The fact that the advanced estimate of US GDP was soft in the first quarter, at 1.8 per cent, wasn't much of a surprise following what was a pretty decent outturn in the fourth quarter ( 3.1 per cent). Government spending in particular was weak which, lets face it, probably isn't a bad thing. But before everyone starts getting excited it was largely driven by a slump in defence spending - and we know that isn't going to last. While private investment was also soft, this appears construction related (due to bad weather) and spending on equipment and software was actually very strong. The main area of growth was in household consumption which rose by 2.7 per cent after a 4 per cent increase in the fourth quarter. All in all there isn't too much to worry about here given the volatility of the series and especially given that weakness was driven by construction and defence spending. Underlying growth remains robust and considerably stronger than what Fed rhetoric would suggest.

Of greater concern was the surge in inflation recorded in the quarter. The headline PCE price index was up 3.8 per cent in the quarter from 1.7 per cent in the fourth quarter and 0.8 per cent in the third. More to the point, core inflation spiked higher as well, rising to 1.5 per cent from 0.4 per cent in the fourth quarter and 0.5 per cent in the third. Those Fed members who reckon they can't see headline inflation 'seeping' into core inflation might want to open their eyes a little. It's funny what you can see when you take the time to actually look. In any case it shouldn't be a surprise to anyone because the manufacturing surveys – ISM and even Fed surveys - have been showing a sharp acceleration in price pressure for quite some time.

Treasuries ignored it though and even managed a modest bid which I find incredible given that in real terms you are losing money holding treasuries. When I was a young whippersnapper I was taught that this was irrational – apparently not. So trading within a 4-6bps range the 2-year yield fell 1bp to 0.62 per cent (from 1630), the 5-year fell 2bps to 2 per cent and the 10-year was off 3bps to 3.3 per cent. Aussie futures were up 1-2 ticks to 94.89 on the 3s and 94.54 on the 10s.

Equities had a modest bid put on as well and this was, again, largely due to positive earnings reports. So far about 75 per cent of companies that have reported have beat expectations. Not a bad effort for an economy which is supposedly fragile and weak. In any case the S&P 500 closed 0.4 per cent higher at 1,360 with consumer goods, financials and utilities the key outperformers. The Dow was up 72 points to 12,763, the Nasdaq rose 0.09 per cent to 2,872, while in Australia the SPI was 0.2 per cent higher at 4,881.

In forex land, the US dollar was bid for a change although moves from 1630 were modest - outside of sterling which fell 80 pips after softer consumer confidence data (GFK index down to -31 from -28). In the end the other major currencies were little changed (up or down 10-15pips), with the Australian dollar at 1.0929, euro at 1.4823 and yen at 81.54. Finally for commodities, gold rose a further $7 to $1536, copper was up 0.6 per cent and crude ended mixed on small moves – WTI up 0.03 per cent ($112.79) and Brent down 0.3 per cent ($124.8).

In other news and data, German unemployment fell 37,000 while the unemployment rate was steady at 7.1 per cent (April data). Import prices then rose 1.1 per cent in March and surged 11.3 per cent annually which suggests upstream price pressures remain acute. Finally in the US, jobless claims rose 25,000 to 429,000 in the week to April 23. Again seasonal adjustment problems due to the timing of Easter and auto shutdowns make it difficult to assess this data. Finally, the NAR pending home sales index rose 5.1 per cent in March to 94.1

Looking at the day ahead, we get New Zealand trade data at 0845 AEST followed by South Korean industrial production data at 0900. For Australia, we get the RBA's credit series at 1130 and RP Data-Rismark's house price series at 1030. Tonight, it's probably worth keeping an eye on euro zone inflation and the confidence indicators. In the US we get monthly personal spending, income and the PCE deflators.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.