US GDP Shocker But It's Not All Bad

The dollar and US index futures are getting smashed ahead of the open on Wall Street after the preliminary reading of US GDP showed the country barely managed any growth in the first quarter, falling short of already low expectations of 1.1% annualised growth. US index futures are now around half a percentage point lower having been flat only a couple of hours ago.

The US dollar is seeing some serious selling pressure following the release, falling to a neat two month low against the euro. EURUSD finally broke through the upper end of the trading range it has been in for the last couple of months, potentially sparking a much bigger correction to the upside. US Treasury yields fell briefly back below 2% following the release as any hopes of a June rate hike were dashed. Even September is looking less likely at this stage, although we can’t forget that a number of factors have played into this poor reading, some of which are temporary. We saw an even worse growth figure in the first quarter of last year and that didn’t have any repercussions for the rest of the year. In fact, the rest of the year was extremely impressive.

While the initial reaction was quite strong, I really don’t think this changes much. Temporary factors can have quite big impacts on quarterly growth, especially when three come along at once (weather, low oil prices and rapid strengthening of the dollar). While the dollar may strengthen more, I doubt it will happen quite so rapidly, allowing companies to adjust. As for the other two, I expect them both to benefit the coming quarters as consumers should have extra cash to spend.

We’ll learn more about what the Fed thinks when the statement is released later but despite the initial reaction in the markets, I think September is far from off the table still. All things considered, it really isn’t as bad as it looks.