- The US economy grew by 4% annualized in the fourth quarter, marking a slowdown.
- Unemployment Claims remain at elevated levels of 847,00, signaling another monthly job loss.
- The already-dovish Federal Reserve may lean toward buying more rather than fewer bonds.
When the economy grew by 4% annualized in mid-2018, then-President Donald Trump called a special press conference to celebrate that. However, the 4% growth rate in the fourth quarter of 2020 only points to a slowdown after the post-lockdown bounce.
Moreover, America's economy is centered on the consumer – and that is a point of weakness. Personal consumption rose at an annualized rate of only 2.5% in the last three months of 2020, worse than 3.1% expected. To add insult to injury, inventories contributed no less than 1.04% to GDP. When storages are replenished in one quarter, they tend to be depleted in the next one. The central bank knows that, and so do markets.
Jobless claims marginally beat estimates with 847,000, below 914,000 last week. However, it still marks extremely high levels in absolute terms. Moreover, it is over the tough of sub-800,000 figures seen when the economy was on a quick recovery trajectory.
These economic figures come less than 24 hours after the Federal Reserve left its interest rates unchanged. When asked about withdrawing some of the stimulus – such as tapering bond buys – Fed Chair Jerome Powell said such talk is premature. Did he have GDP figures in advance? In any case, hie comments that "the recovery still has a long way to go" are vindicated.
See Fed Analysis: Powell refuses to stop the stock party, dollar may suffer some pressure
The Fed is currently expanding its balance sheet by $120 billion per month and signaled no cutback is on the cards. Will it take the extra step and expand bond buying? While the data suggest additional help may be needed, Powell may wait to see what his predecessor at the job achieves across Washington.
Treasury Secretary Janet Yellen is trying to pass President Joe Biden's generous $1.9 trillion relief package – or at least some of it. Some of the current government programs expire in mid-March – serving as a deadline. The "Ides of March" is also when the Fed convenes again. By then, the Fed will have a ballpark estimate of upcoming debt issuance and how much it would need to buy to keep Treasury yields low.
Nevertheless, investors could begin speculating about a potential upgrade of its bond-buying scheme already now. In this scenario, stocks would have more fuel to rise, while the safe-haven dollar would fall. Moreover, markets may already be seeking to "buy the dip" after Wednesday's sell-off.
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