Dollar weakness is the theme for today, with the American currency coming under pressure following the Fed meeting yesterday, and a disappointment in US GDP data.
US equities managed to make small gains, helped by more good earnings reports and the expectation of continued loose monetary policy in the US.
As if one day of US dollar-negative news was not enough, we are now into a second day. The world’s reserve currency was already struggling after Ben Bernanke increased his inflation forecast while simultaneously hinting that monetary was a long way off. It has now been hit by slower GDP growth and a rise in jobless claims that reminds everyone, a good earnings season notwithstanding, that the US economic recovery is by no means a done deal.
US data disappoints
As markets took stock of yesterday’s Fed press conference, data was published that showed that growth in the US economy slowed in the first three months of the year. The annual rate of growth edged down to 1.8%, compared to the predicted 2%, from the previous quarter’s rate of 3.2%. The figure is a first estimate, and there will be several revisions in the coming months.
Higher gasoline prices crimped growth as US consumers found that they had less money to spend on other items. GDP was also hit by a sharp rise in imports, while government spending at both the Federal and state level was lower. However, personal consumption was higher for the period, at 2.7% compared to the forecast 2%, reflecting some increase in confidence among US consumers.
The weaker economy comes as prices begin to rise due to commodity price inflation, and the outlook remains rather gloomy, with the Federal Reserve having said yesterday that it had downgraded economic growth for 2011 to 3.1 to 3.3%, instead of the expected 3.4 to 3.9%.
Progress in the US labour market was rudely interrupted last week, as jobless claims rose unexpectedly to 429,000, instead of dropping to 395,000. The 25,000 increase for the seven days to 23 April is the largest rise since late January. The US government usually sees a fall in applications for the Good Friday weekend, which did not occur this year, due to the impact of car plant shutdowns in the aftermath of the Japan earthquake. The continuing claims figure was down by 68,000 for the week to 16 April, to 3.64 million, its lowest level since September 2008.
The mixed picture illustrates how changeable the US economy remains, with growth of one week easily cancelled out in the following week. Nevertheless, the Federal Reserve still expects unemployment to reduce to 8.4% to 8.7% for this year, instead of 8.8% to 9% as previously forecast.
During the afternoon, the US dollar index posted further losses, and by 3.30pm (London time) was down 0.6%. Meanwhile, the twin threats of inflation and a slowing economy put a rocket under gold and silver prices, with gold now at $1534 per ounce and silver racing back towards $50.
US equities – eBay, Procter & Gamble
By 3.30pm (London time), the Dow Jones was marginally higher, up 14.27 points (0.11%) to 12705.23, while the S&P 500 was nudged forward 0.48 points (0.04%) to 1356.14.
First quarter revenue at online auction site eBay rose 16% to $2.55 billion, ahead of the forecast $2.48 billion, as its PayPal division saw a 23% surge in revenue. Adjusted earnings were 47 cents per share, just ahead of the Reuters forecast. The company provided a bright forecast for the current quarter, with expected earnings of 45 to 46 cents per share in line with forecasts. eBay shares were 1.7% lower at $33.45.
Sales growth helped to push revenue at Proctor & Gamble up 11% in the first quarter, which was in line with expectations. However, the firm cut profit forecasts due to higher raw material costs and slowing growth in its European markets. Full-year earnings are now expected to be $3.91 to $3.96, down five cents. Commodity-related cost increases are forecast to be around $1.8 billion, triple the original expected figure. Shares in the firm were down 0.3% at $63.82.
UK afternoon trading – WPP, British American Tobacco
The FTSE 100 struggled to keep out of negative territory, and was barely changed by 3.30pm (London time), at 6069.22. However, the UK-focussed FTSE 250 was 0.88% higher at 11999.38.
Advertising giant WPP, which recently announced plans to move back to the UK, rose 2.7% to 780p as it increased its forecasts for the full year despite tougher comparatives in the second half. Sales were up 7% in the first quarter, and like-for-like growth is now expected to be 6% rather than 5%. WPP said that the rapid recovery in advertising in the US and Germany, which had surprised the firm last year, had continued into 2011. Growth remains strongest in emerging markets, with Latin America up 16.7% and Asia-Pacific (excluding Japan) 13.8% higher.
British American Tobacco (BAT) still expects market share growth across its operations in spite of a first-quarter drop in volumes. Group volumes were down 2.4%, although organic revenue was still up 5%. The firm also continues to benefit from cost-cutting efforts that have helped to broaden margins. BAT shares were 1% lower at 2606p.
