Shocked by GDP Data

July 30, 2020

Market attention shifted from the pandemic data trends to the disease’s economic havoc.

This development gave the recently weakening dollar a lift as it benefited from safe-haven demand. Overnight dollar advances range from 0.2% against the yen and Swiss franc to 0.3% versus the euro, 0.6% relative to the kiwi, loonie and Aussie dollar and 0.7% against the Mexican peso. The dollar is unchanged against China’s yuan and 0.2% softer against sterling.

The refocus of investor attention happened in the latter part of Asia’s day, so the equities there fell just 0.3% in Japan, 0.7% in Hong Kong and 0.2% in China while rising by 1.0% in New Zealand and 0.7% in Australia. In European markets, by contrast, share prices have tumbled so far by more than 2.0% in Germany, Spain and Italy and by over 1.0% in the U.K., Switzerland and France. The Dow Jones Industrials index slumped 1.4% within the first ten minutes of U.S. trading.

Sovereign debt instruments have been well bid, depressing 10-year yields by four basis points in Germany and Great Britain and two basis points in U.S. Treasury futures trading.

WTI oil and Comex gold fell back 1.5% and 0.3%.

U.S. real GDP fell 9.5% on quarter (or by 32.9% at a seasonally adjusted annual rate). Analysts had projected a 30% drop in GDP. Real private domestic demand accounted for 30.4 percentage points of the 32.9% slump, and inventories subtracted another four percentage points (ppts) from real GDP growth. Government spending (0.82 ppts) and net exports (+0.68 ppts) provided some positive support.  Real GDP was 9.5% lower than a year earlier compared to positive on-year growth of 0.3% in the first quarter and 2.0% in the second quarter of 2019. The personal consumption price deflator imploded 1.8% between 1Q and 2Q and was a mere 0.6% higher than a year earlier. Core PCE price deflation fell to 0.8%, also less than half the Fed’s target.

New U.S. weekly jobless insurance claims increased for a second straight week, reaching 1.434 million last week. That lifted the four-week moving average to 1.368 million and was accompanied by an 867k advance in the latest weekly tally of continuing jobless insurance claims to 17.018 million.

German real GDP slumped by a greater-than-anticipated 10.1% on quarter in 2Q (not annualized) and by 11.7% on year. There has been positive growth just once in the past five reported quarters.

Belgian real GDP sank 12.2% last quarter and was 14.5% lower than in the second quarter of 2019. Austrian GDP tumbled 10.7% on quarter and 12.8% on year.

Mexico outdid even the above figures. That economy’s real GDP plunged 17.3% on quarter and 18.9% on year. On-year growth in the second quarter of 2019 had also been negative (-1.1%).

Euroland’s unemployment unexpectedly rose 0.1 percentage point in June to a 16-month high of 7.8%. Among young workers, the jobless rate leaped half a percentage point to 17.0%.

Portuguese industrial production recovered 11.2% in June but was still 14.6% lower than a year earlier. Portugal’s business sentiment index improved 1.4 points in July but remained below zero (-2.9%) for a fourth straight month. Portuguese consumer confidence improved 4.6 index points but remained very negative at 28.3 in July.

A 13.1% June rebound in Japanese retail sales still left such below the year-earlier total by 1.2%. The on-year comparison was negative in five of the six months of the first half of 2020.

The aforementioned 0.6% on-year rise of U.S. inflation according to the PCE price deflator was one of several disinflationary reports out today. This confirms Fed Chairman Powell’s assertion yesterday that on balance the pandemic shock would exert a downward force on inflation.

Other signs today of rapidly receding inflation include

  • A swing in German CPI inflation to minus 0.1% in July from 0.9% in June and 1.7% at the start of 2020. Such hadn’t been negative since April 2016.
  • French producer prices were 2.7% lower in June than a year earlier.
  • Spanish consumer prices fell 0.9% on month and 0.6% on year in July.
  • Greek producer price inflation of -7.4% in June was negative for a fifth straight month.
  • Filipino PPI inflation was -3.9% in June and was last above zero in December 2019.
  • Belgian CPI inflation was 0.7% in July.
  • South African producer prices dropped 2.1% between mid-2019 and June 2020.
  • Between the second quarters of 2019 and 2020, Australian import prices and export prices respectively declined 1.9% and 3.8%.

Economic sentiment in the euro area printed at a 4-month high in July of 82.3, having bottomed in April with a reading of 64.8, but it remains well below February’s 103.4 level. Consumer confidence and sentiment in the construction sector were weaker in July than June.

Industrial production in Cyprus and Portugal were 14.9% and 14.6% below year-earlier levels.

Business confidence rose in July to 4-month highs in the Netherlands, Denmark and Spain and to 3-month highs in Singapore and Portugal. However, all the latest readings were under zero.

Perhaps the brightest report out today was Germany’s monthly labor market data, which revealed an unexpected decline of 18k unemployed workers and an unchanged jobless rate.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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