• US Equities shrugged off poor GDP data, taking the S&P to a three month high. This morning, Asian shares climb higher supported by better than expected Japanese eco data.

  • US first quarter GDP contracted by an annualized 6.1% Q/Q due to massive liquidation of inventories and a sharp plunge in investments. Consumer spending turned positive, the first time in three quarters.

  • The World Health Organization said on Wednesday that the world is at the brink of a pandemic and raised the official alert level to phase 5.

  • The Bank of Japan decided unanimously to keep rates on hold and held off on any new initiatives as it gauges whether the measures taken so far are helping to ease the country’s recession.

  • The Central Bank of New Zealand cut interest rates by 50 basis points to 2.50% and pledged to keep rates low for more than a year. The Bank added that rates could still move modestly lower.

  • BASF reported a 68% drop in first quarter profit and remained gloomy about the full-year outlook as it sees no shift in the current trend and expects therefore an even greater fall in earnings.


Markets

On Wednesday, markets had several interesting features to look out for with among others, the EU economic sentiment indicators, the US Q1 GDP and the Fed monetary policy decision on the agenda. The data were mixed with the EU sentiment indicators confirming the cautious improvement seen in other indicators of late. The headline figure of the Q1 GDP showed a steeper than expected contraction in US Q1 economic activity. However, looking at the price action on the equity markets, investors focused on a few spots of brightness in the report (sharp decline in inventories and a modest rebound in consumption). A similar reaction was seen after the publication of the Fed policy statement. The communiqué brought no major surprises, but the (equity) markets took notice of the Fed stating that “the pace of contraction appears to be somewhat slower”. The S&P briefly spiked above the key 877 area, but didn’t manage to close above this level, yet.

The Fed assessment was seen as good news for the equity markets but US Treasuries again had to fight an uphill battle. A 7-year US bond auction went reasonably well, but Treasuries made another step backward after publication of the Fed statement. The Fed didn’t bring any new info on its asset purchases. They tried to buy some time, stating that “the committee will continue to evaluate the timing and the overall amounts of its purchases of securities in the light of the evolving economic outlook and conditions in financial markets”. However, bond markets apparently had hoped for a more bold Fed engagement on the pace and/or the amounts of security purchases. US yields spiked higher after the publication. The 10-year yields broke above the high profile resistance level at 3.05%. The 30-year was already above the comparably 3.85% area and currently tests the psychological level of 4.00%. Those moves are still well contained. However, the least one can say is that they signal some market uncertainty on the efficacy and the long-term sustainability of the Fed’s QE policy going forward. European bond markets outperformed their US counterparts and even closed the session with limited gains. However, those gains are reversed at the open of trading this morning.

On the currency markets, the euro remains in good shape. A constructive global investor sentiment sent EUR/USD above the 1.33 area. There was a limited, buy-theroom, sell the fact reaction immediately after the Fed decision. However, at least for now, we have the impression that the market uncertainty on the implementation and the consequences of the Fed’s policy on securities’ buying has become a slightly negative factor for the dollar. Of course, this shouldn’t last too long. Next week ECB meeting might become a factor of (temporary) euro caution, too.

Today, the calendar contains the flash estimate of euro zone CPI (April), the euro zone unemployment rate (March), US weekly claims and Chicago PMI. The flash estimate of euro zone CPI is forecasted to show a slight uptick in April (0.7% Y/Y from 0.6% Y/Y) due to the timing of Easter. In the coming months however, inflation is expected to decline further and a temporary negative outcome is not excluded. The euro zone unemployment rate is forecasted to come out at 8.7% in March (from 8.5%). In the US, initial claims are expected to stay flat at 640 000, but temporary volatility after the Easter holidays is not excluded. The consensus is looking for a slight increase in the Chicago PMI (35.0 from 31.4), but we see the risks on the upside of expectations after the positive surprises in earlier released regional business confidence surveys. If confirmed, this raises expectations that also the manufacturing ISM will show a significant improvement on Friday.