GDP Quick Analysis: Early crash means more Fed stimulus, stocks positive, dollar negative

Coronavirus has taken an initial toll on the US economy, which squeezed by an annualized pace of 4.8%.
Consumption plunged by 7.6%, more than double the expectations.
Fed officials incorporate the data into its decision and forecasts and they may offer more stimulus.
The dollar is set to decline and stocks to advance.

Yohay Elam FXStreet

The hard data is out – and it is heartbreaking, especially as it is only the beginning. The US economy squeezed by 4.8% annualized. Officials admit the data is incomplete, it was released later than expected, and one data provider erroneously published a positive figure.

Yet as the dust is settling, the data is still devastating – the worst contraction since the financial crisis and at -4.8% annualized, it is worse than 4% expected. Moreover, as the economic impact of coronavirus hit US shores only in March, everybody knows it is only the tip of the iceberg.

Looking deeper into the data, personal consumption tumbled by 7.6% annualized, far worse than a slide of 3.6%. America's economy is centered around consumption and if it dropped so sharply when people were stockpiling – it will likely get far worse.

The action is not over and the GDP release comes just hours ahead of the Federal Reserve's decision – the first scheduled one since January, yet after a long series of extraordinary announcements including slashing rates to 0%, and enlarging its balance sheet by over 50% to around $6.5 trillion.

The Fed will likely publish new forecasts for growth today – and takes these figures into account. Jerome Powell, Chairman of the Federal Reserve, has defied pessimists including your columnist, by producing more bunnies out of its sleeve – finding more stimulus tools. Unleashing unlimited Quantitative Easing, buying municipal bonds, and venturing into "fallen angels" – aka junk bonds – shows it has more room to act.

Given the severity of the data, the Fed may opt to further stimulate the economy and print more money. That is good news for stocks, which benefit from an abundance of liquidity, and detrimental for the dollar. The greenback has room to fall due to its safe-haven status and to a lesser extent due to flooding markets with greenbacks.

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Other winners may be gold, and the yen, which recently has a mixed record as a safe-haven, may be a loser.

More GDP Quick Analysis: US First Quarter GDP Quick Analysis: Can a recession be avoided?

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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