US consumption boom powers growth but dollar may still struggle

The third reading of the Q4 2016 US GDP report saw an upward revision to 2.1% from 1.9% and the detail suggests that the US economy started 2017 on a very strong note. The key takeaways from this final reading of GDP was strong personal consumption, which was revised up to 3.5% for the quarter, another upward revision for corporate profits, which were up 0.5% in the final three months of 2016, and weaker trade data that actually dragged on growth.

The stronger consumption data and better corporate profits goes some way to explain the pick-up in job growth in the US at the start of this year. If corporate profits can continue to rise in 2017 then we could see further strength in the US labour market, which could put more pressure on wage growth and on the Fed to hike interest rates, possibly more than the two rate hikes already anticipated by the Fed’s dot plot.

Imports could prove a headache for Trump

The trade data is more problematic from a political perspective. Imports surged by 9% in Q4 and exports fell by 4.5% at the same time. Stronger personal consumption was likely a key driver of the rise in imports. This poses a quandary for Trump – if his import tax comes into play then this could essentially act as a stealth tax against consumers, which would not be good for his political ratings. Thus, as Trump hashes out his tax plan on Capitol Hill, he may choose to shelve some of his ideas for penalising importers as the economic reality starts to shape Trump’s legislative agenda.

The market reaction

From a market perspective, today’s report is mildly dollar positive, especially on the back of weaker European inflation and Brexit hanging like Damocles’’ sword over the pound and other UK assets. Although US yields rose on the back of this report on Thursday, 10-year yields need to rise above 2.5% to trigger a decent dollar rally. The S&P 500 was a touch higher on the back of this report, as the consumer discretionary sector received a boost from the stronger personal consumption data. We don’t think that today’s report will have much of a long-term impact on the US equity market, as technicals come to the fore. Unless we break above 2,390, the high from mid-March, then this index looks shaky from a technical standpoint.

Although today’s data was strong, the Q4 GDP report was yesterday’s news, the market will only push the dollar and US stocks higher if economic data continues to strengthen as we move into Q2, and if Trump keeps his policy promises.