Key economic indicators for the US have continued their slow but steady improvement. US GDP¹ grew by 2.4 percent in the first quarter of 2013, up from an annualized 0.4 per cent in the fourth quarter of 2012. US private consumption rose from 1.8 to 3.4 per cent (annualized) despite assumed fiscal cliff headwinds, which could have induced fiscal retrenchment. The Case-Shiller 20-city index² rose by 9.3 per cent year over year and 1.24 per cent month over month; consequently, the US deficit shrank more than expected, to 5.7 percent of GDP, down from 8.1 per cent one year ago.
Japan's economic growth also appears to be accelerating, perhaps from witnessing the initial impact of the new economic policies under Prime Minister Abe. However, growth in Asia (ex-Japan) and Latin America seems to be stagnating, and euro-zone growth is once again decelerating. The euro-zone economies are experiencing a double dip, with the current retrenchment lasting longer than the sharp downturn at the onset of the great financial crisis.
The biggest impact of these diverging macroeconomic developments was felt in the currency and commodity markets. As anticipated, the Japanese yen (JPY) continued its downward trend versus all major currencies; for the first time in five years, it fell to just above the technically important JPY 100 per USD 1 threshold. The euro also showed weakness against the dollar, falling to below USD 1.30 per EUR 1; and emerging market currencies, as predicted, showed trade-weighted gains. ommodities and commodityrelated issues were also weak, with Brent Crude repeatedly testing the USD 100 per barrel level. The biggest shock was reserved for gold prices, which twice fell to below USD 1400 per ounce and appear to be headed lower.
The asset price movements took place against a background of generally low equity volatility in an overall constructive market, with the VIX³ staying low at around 14. Yield curves continued to remain subdued, with many yields falling to multi-decade or historic lows. For now, central banks appear to be in control and managing the process of financial repression. Interestingly, in a break with the correlation of recent years, a greater risk appetite now seems to be benefiting the USD. In next month's newsletter, we will examine how our own asset class predictions have done in relative terms, and we will identify what we believe will be the major market risks for the second half of 2013.