Windshield or Rearview Mirror?

The US dollar reacted to a sharp downward revision in first quarter GDP Wednesday but will the Fed fret about data that's 3 months old? The New Zealand dollar led the way and closed near a 9-month high Wednesday while the pound and US dollar lagged. The Asia-Pacific calendar is light.  

The market had two looks at the US economy on Wednesday. The Q1 GDP report showed a shocking 2.9% annualized contraction, much worse than the -1.8% consensus. The main reason for the miss was a sharp downward revision in healthcare spending to -1.4% from +9.1.% as the statisticians clearly misunderstood the costs and effects of Obamacare. Alone that shaved 1.1 percentage points from growth. Inventories, trade and the consumer were also drags but that was driven to some extent by weather.

For the market, that report was all that mattered. The economy will now need to grow at a 3.6% clip or better for the rest of the year just to hit 2% growth. The 3% forecast from the Fed at the start of the year is virtually impossible. USD/JPY fell 30 pips and EUR/USD rose by 50.

The other data point on the day was durable goods orders and although the headline was soft the core component, which is the measure of business investment rose 0.7% compared to 0.5% expected.

It underscores that nearer-term data is painting a much better picture of the US economy. The Markit services PMI also rose to the highest in its 8-year history at 61.2 compared to 58.0 expected. Later in the day the market began to reflect the improvement as much of the US dollar decline eroded.

Up next is Thursday's May PCE report. It offers a sense of consumer spending and inflation. Ford said US auto sales have continued to be robust in June and more good news on the near-term economy or a rise in inflation could quickly turn the tables on USD weakness.