Analysts Believe Rate Hike Hawks Will Ignore Poor GDP Reading
The Dow Jones Industrial Average and other equities lost value yesterday following the final Q1 GDP revision, which showed a -0.2% contraction, as expected. The US Federal Reserve, however, shows no sign of retreating on intentions to raise interest rates before the end of 2015, in spite of leaks that indicate the Fed is ignoring the possible volatility risks resulting from disregarding the market when determining policy. Although growth is well below trend, markets consider the GDP reading as proof of an economic rebound, based on increasing inventories and healthcare spending, which offset export and fixed asset investment weakness.
France’s GDP showed a 0.6% growth according to Insee data released yesterday. Although the number indicates record acceleration for recent years, most of this is being attributed to a weak Euro that facilitates cheaper exports. Unemployment, on the other hand, is also at record highs, as the anti-euro and anti-austerity drive gains strength in France, too. As the government fails to stem rising unemployment, the level of jobseekers has been growing for nearly seven straight years. With budgetary regulations trumping fiscal stimulus, labor regulations that discourage employers and investors, and a level of competitiveness that has been steadily dropping, the CAC-40 index continues to trade under pressure as asset purchases by regional central banks continues to disappoint.
Greece has refused demands to reduce pension obligations and cut spending rather than increasing taxes – key requirements being dictated by the IMF. Creditors claim that there is nothing new in the country’s proposals, as parties abandoned negotiations yesterday. Talks may resume today, however optimism is fading as the current bailout package is due to end on June 30th. Without an agreement, the ECB will probably cancel its support for Greece’s banking sector and capital controls are likely to be implemented. If, on the other hand, agreement is reached, it will still have to pass the Greek parliamentary threshold, which is at present becoming more and more splintered. Meanwhile, the Euro has been losing value after trending slightly higher from the GBP.