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Currencies And Stocks Fail to Escape GDP Sting

Published 07/31/2020, 04:18 AM
Updated 07/09/2023, 06:31 PM
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Currencies and equities traded lower on the back of the biggest quarterly drop in U.S. GDP ever. The U.S. economy contracted 32.9% on an annualized basis in the second quarter. Americans have never experienced a decline as quickly and as sharply as this one.
 
Technically, the U.S. economy is in recession and, according to the National Bureau of Economic Research, the current recession started in February. Unlike prior recessions, this was abrupt, not gradual, because of the mandated lockdown and suspensions of economic activity to slow the spread of the virus. This report underscores the extent of the COVID-19 damage on the U.S. economy between April and June. While the contraction was slightly better than forecast, it was a terrible number and a reality shock for investors, who responded by selling currencies and equities. 
 
Yet, unless the virus completely takes over the U.S. in the next two months, forcing states into complete lockdowns once again, Q3 growth will be better than Q2. Some states tightened restrictions but stopped short of suspending economic activity and this appears to be working. The number of deaths are rising, but the number of cases are stabilizing in the sunbelt, and deaths, which follow cases with delay, should as well. However, there’s also no question that the recent uptick in cases slowed the recovery, so the snap-back in Q3 won’t be the V-shaped recovery that White House advisor Larry Kudlow promises.
 
Jobless claims have trickled higher for the second week in a row and with extra jobless benefits expiring, these numbers will worsen. The trend of weaker U.S. data is likely to continue with tomorrow’s personal income and personal spending reports. The Senate also failed to pass the extension of emergency jobless benefits, which means that it will take even longer for Americans to receive the support they need.
 
The contraction in Germany last quarter was deeper than expected but instead of falling, EUR/USD made another run for 1.18. This may be confusing to some traders who note the U.S. data beat and German data miss. However, on an absolute basis, German growth fell only 10%. This is still the worst quarter for Germany in at least 50 years. GDP numbers are due from Spain, France, Italy and the Eurozone tomorrow, and deep contractions are expected all around. So while EUR/USD rallied today on the fact that the U.S. contracted faster in Q2 than Germany, the pair is due for a correction. It is particularly vulnerable for a pullback with virus cases in France and Italy rising.
 
There was no UK economic reports released today and perhaps this lack of data is the reason why sterling was the best performer. It's now been 10 days since GBP saw a decline versus USD. Today’s strong rally took the pair to a new four-month high. The worst performing currency was the Canadian dollar, which was pressured by lower oil prices. Monthly GDP numbers are due from Canada tomorrow and, based on the increase in spending and trade in May, positive growth is expected. The Australian and New Zealand dollars also pulled back and it was no surprise to see A$ outstrip NZ$ in losses despite weaker than expected data from both countries. In New Zealand, building permits stagnated in the month of June and business confidence was revised lower. In Australia, building approvals, import and export prices fell more than expected. New Zealand consumer confidence numbers are scheduled for release this evening along with Chinese PMIs and Australian PPI.   

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