Interest Rate Roundup

Friday, April 27, 2007

Doggy GDP report for Q1 '07

So much for the U.S. economic miracle. Q1 2007 Gross Domestic Product grew even less than expected -- 1.3% versus the 1.8% forecast. That was the slowest rate of growth since Q1 2003. Meanwhile, inflation was stronger than expected. A classic case of Stagflation Lite. More details:

* Residential investment was a major drag again, down 17% at an annualized rate (the rate of decline was somewhat lower than the previous two quarters, however, when it came in at -19.8% and -18.7%). Personal consumption gained 3.8%, led by a 7.3% rise in durable goods spending. Government spending rose just 0.9%, dragged down by national defense spending. Exports were weak (-1.2%) while imports were up modestly (+2.3%)

* Inflation was anything but tame. The overall GDP price index surged at an annualized rate of 4%, the most since Q1 1991. The core GDP price index popped up to 3% from 2.3% a quarter earlier. Meanwhile, the personal consumption expenditures index (another measure of price inflation) climbed 3.4%, up from 1% in Q4 2006. And the "core" PCE index gained 2.2%, up from 1.8% a quarter earlier.

* I said yesterday that a greater-than-0.5% variance from expectations could ignite some real fireworks in the markets. Well, the dollar is getting clubbed and the euro is tying its all-time high as I write. The pound is also up more than a cent, and other currencies are rising against the buck.

Here's something else to consider: While the bonds initially surged on the weaker-than-forecast growth figures, they are now FALLING a on the stronger-than-expected inflation data. This could be significant -- the first time in a while we've seen both the dollar AND bonds sell off in a while.

The key question now: Where do all the markets close?


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