The US dollar reached a three-month high against the yen, rose against the euro and down went commodities, led by oil.
The trigger was the second reading for March quarter economic growth in the US, which showed an improvement from an annual rate of 0.6% to a new reading of 0.9% for the three months.
The rebound though was more influenced by a rally in sentiment about inflation: more and more US investors are convinced the US Federal Reserve will be forced to lift interest rates because inflation, led by oil, is soaring.
Helping were comments from a senior member of the Fed that the central bank will lift rates if it detects consumers raising their expectations about inflation.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Oil, gold, silver, copper, corn, wheat, lead, zinc, tin and sugar: just about most major commodities fell sharply overnight as a result.
The US dollar though strengthened because investors think it has been oversold and its time to buy back in: the Australian dollar resisted the selling for a while but then fell under 96 US cents.
Better than expected oil supply figures in the US helped change sentiment about oil and it gave up its gains of Wednesday.
But is the interpretation of the second US GDP report valid? Is the US economy doing better than thought? Well with annualised growth rising to 0.9% from 0.6% (and December quarter’s figure remains at 0.6%) it would seem so.
But it’s a bit misleading: in fact like Australia the US (or should it be we are moving into a situation like the US) the external account is much stronger than the domestic economy.
A smaller trade deficit for the month of March (and therefore for the quarter) was the reason for the change. The trade figures for March were not out when the first estimate of 0.6% was given a couple of week ago.
But the March trade report showed a sharp fall in the level of exports, thanks to slump in the value of the greenback, which pushes up the cost of imports, and sluggish demand from the domestic economy.
It was in fact the sharpest fall in six years in the level of imports into the US. It was a case of bad news generating good news, if you like.
In contrast the cheaper dollar is still stimulating export growth and therefore trade’s contribution to first quarter growth was four times higher than initially reported at 0.8 percentage point.
The export boom explains while durable goods orders remain so strong, relative to other parts of the US economy: it’s little wonder the trade figures would change the GDP numbers in the second report, but they do disguise the still moribund nature of the domestic US economy, which means more pressure on jobs.
Major US retailer, sears surprised with a first quarter loss, thanks to sluggish demand and intensifying competition eating into profit margins.
Also contributing to the improved GDP estimate were upward revisions in non-residential structures and personal consumption expenditures for non-durable goods while there was a huge turnaround in the original estimate of a big increase in inventories (meaning lots of unsold goods) to a much larger fall.
Economists said the results of these changes was that US real final sales of domestic product, a measure which subtracts that fall in private inventories from GDP, increased by 0.7% in the first quarter, from an originally reported drop of 0.2%.
So in some respects the US is none the wiser about just where the economy is at the moment, except to say that rising oil prices are terrifying an awful lot of people: that’s why yields on 10 year bonds finished up at 4.07% overnight. Wall Street might have firmed, but investors are waiting for the normal reaction to rising rates: selling shares.
US inflation in the second report was still running at an annual rate of 3.5% according to the so-called GDP price deflator, or 2.2% on a core basis used by the US Fed.
That’s still well above the Fed’s preferred range of 1%-2% over a 12 month period. It’s why the bond market has been sold off and the inflation bears are back in charge.
But the UK looks more and more like it will beat the US to the bottom: house prices fell by the most since 1991 in May: down 2.5%% and retail prices are now rising at the fastest rate since 1990. the number of new mortgages being sold by banks and other lenders has collapsed by around 40% in some parts of the country and more and more real estate agents and building groups and suppliers are in trouble.