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Stock markets party even as US economy contracts


US economy flirts with recession after second negative GDP print

Bad news is good news for stock markets, solid earnings help too

Yen stages sharp comeback, dollar loses some steam, gold bounces

Don’t call it recession

The United States is teetering on the edge of a recession after the economy shrank for a second consecutive quarter, adding another headache for Federal Reserve officials in their fight against roaring inflation.

Dissecting the GDP report, the silver lining was that much of this contraction boiled down to inventories being unwound and government spending rolling off. Consumers are still spending and exports have started to fire up, although the weakness in investment is a bad omen for what comes next.

While two straight quarters of negative growth would normally qualify as a technical recession, the Fed and White House have stressed this is not a ‘real’ recession since we haven’t seen businesses going bankrupt or massive job losses. Nonetheless, the economy is stalling and it might be only a matter of time until the labor market shows cracks considering that jobless claims are trending higher and business surveys point to plans to slow hiring.

Traders bet on cautious Fed

The disappointing GDP reading sent shockwaves through global markets, with the price action in bonds and equities telling the same story - the end of the Fed’s tightening cycle is approaching. Treasury yields fell across the curve and Fed funds futures point to a lower terminal point for interest rates, which are now expected to peak at 3.25% in December.

In classic fashion, bad news on the economy was good news for stock markets amid hopes the Fed won’t keep raising interest rates with reckless abandon in the face of faltering growth. The S&P 500 climbed 1.2% and futures point to another round of gains today following some cheerful earnings from Amazon and Apple.

Amazon shares rose a whopping 12% in after-hours trading after the e-commerce and cloud computing behemoth overcame revenue expectations and provided a cheerful forecast for the rest of the year, calming some nerves around consumer spending. Meanwhile, Apple shares gained 3% after the company reported slightly stronger-than-expected earnings and revenue.

The bar was set so low heading into this earnings season that companies are jumping over it without much effort, and investors are taking solace in the fact that the situation is not catastrophic.

Yen gets its mojo back

Over in the FX complex, the yen has come back to life. The retreat in global yields as investors reconsider how far the Fed can raise rates was exactly what the doctor ordered for the Japanese currency, which is about to close the week with gains exceeding 2% against the US dollar.

The Bank of Japan’s refusal to even consider tighter policy and the loss of the nation’s historical trade surplus as energy prices went ballistic were the two main forces that pummeled the yen this year. Now that growth is losing power and foreign central banks are expected to slow their own tightening plans, the yen has started to stand on its feet, with a little help from stable oil prices too.

The dollar is set to close the week with some losses, but admittedly the retreat has been rather mild considering the rethink around Fed policy and the sanguine mood in riskier assets. Finally, with the wind coming out of the dollar’s sails and real 10-year Treasury yields getting cut in half this week, gold prices have received the green light to cruise higher.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-stock-markets-party-as-us-economy-contracts-164174
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