US GDP Falls 4.8% in Q1 as Coronavirus Weighs on Consumer Spending

 

Risk assets decline as financial markets weigh the costs/benefits of reopening the economy. Yesterday equity markets couldn’t hold on to early gains as major stock indices finished in the red, with the tech-heavy Nasdaq (-1.40%) posting the largest loss. Crude oil prices continued to slip amid the ongoing storage concerns — WTI finishing 3.7% lower at $12.31/barrel after falling as much as 20% earlier in the trading session. Treasury yields/swap rates declined across the curve, pushing the 10yr UST yield near 0.61%.

 

 

US GDP shrank 4.8% in Q1. This is first negative reading since 2014 and the largest decline since the 2008 financial crisis. Consumer spending, which made up 67% of GDP, fell 7.6% as stores began closing and lockdowns increased. Spending on durable goods and services fell 16.1% and 10.2%, respectively. With supply chains heavily affected in the early days of the outbreak, international trade contracted with exports and imports dropping 8.7% and 15.3% respectively. The Bureau of Economic Analysis added that the majority of economic damage happened at the end of the quarter when “stay-at-home” orders were issued, leading “to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted, or redirected their spending.”

 

 

COVID-19 Update. Global reports are providing conflicting stories regarding virus cases. The state of New York reported a fall in fatalities from 335 on Tuesday versus 337 on Monday. Other governments reported a rise in the rate of infection, with the UK reporting 586 fatalities versus 300 and Canada revealing a rise in cases to 49,025 from 47,327 from the day before. Many US states are still on track to reopen, with Alabama, Texas, and Georgia further easing restrictions on select businesses starting Friday.

 

 

Day ahead. Later this morning, the National Association of Realtors will release pending home sales, with economists forecasting the index will fall by 10% for March to reflect the initial impact of the virus on the housing market. Shortly after, the EIA will release their weekly petroleum status report, with oil experts predicting an inventory increase of 15M barrels of crude. This afternoon the FOMC concludes its two day policy meeting where it is expected that the Fed will leave benchmark borrowing rates near 0% as the US economy continues to deal with the fallout of the pandemic. Financial markets will be closely monitoring Fed Chair Powell’s press conference afterwards to see if there are any indications as to how long he expects the Fed to maintain (or even expand) its accommodative monetary policy.