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US Q1 GDP Report Could Be Non-Event Because Traders Are Already Pricing-in Weaker Second Quarter

James Hyerczyk
Again, don’t try to anticipate the data, let the Treasurys dictate the move. Like I said before, the report contains dated information so it’s possible we’ll see a muted reaction to the news. The futures markets are already pricing in a weaker economy and a Fed rate cut later in the year. Try to avoid getting trapped on the wrong side of this report.

Stocks in Europe are edging higher on Thursday as investors continue to look for clues as to the current state of U.S.-China trade relations. The price action indicates some light buying and position-squaring ahead of today’s key event – the release of the U.S. Gross Domestic Product report at 12: 30 GMT.

This can be a tricky report to read because it is only preliminary data and it is stale data. Traders are looking for a reading of 3.1%, down slightly from 3.2%. It may not be the actual number, per se, that drives the price action, but how investors project overall second quarter GDP, given the increased tariffs between the United States and China that are expected to kick in on June 1.

The GDP number could come in as expected at 3.1%. This may be read as bullish for some investors because it means the economy has some wiggle room to play with when the new tariffs start to trickle through the economy during the second quarter. A number below 3.1% is likely to be read as bearish because it will indicate the economy had been weakening even before the tariff was imposed. In this case, investors will feel that things could only get worse.

We could also see a muted response to the report because it is old data and conditions have changed since it was compiled, and likely to change even more before the final figures are tabulated. When analyzing today’s report, keep in mind that it is actually a look back at how the economy did in the first quarter of 2019. The second estimate for the prior quarter is released nearly two full months into the current quarter.

Going into the report, J.P. Morgan economists are already predicting much slower second-quarter growth of just 1%, down from their prior forecast of 2.25% and way off the 3.2% reported in the first quarter.

“The April durable goods report was bad, particularly the details relating to capital goods orders and shipments. Coming on the heels of last week’s crummy April retail sales report, it suggests second quarter activity growth is sharply downshifting from the first quarter pace,” the economists wrote.

The J.P. Morgan economists said the key risks they see for U.S. growth include the uncertainty from the trade war, impacting business sentiment, and global economic slowing.

The U.S. markets that could be affected by the report are Treasuries, S&P 500 Index futures and Fed Funds futures. Judging from this week’s performance in the Treasuries and Fed Fund futures, it looks like investors are already pricing in a weaker economy in the future.

Currencies that could be affected are USD/JPY, EUR/USD and USD/CNY.

Again, don’t try to anticipate the data, let the Treasurys dictate the move. Like I said before, the report contains dated information so it’s possible we’ll see a muted reaction to the news. The futures markets are already pricing in a weaker economy and a Fed rate cut later in the year. Try to avoid getting trapped on the wrong side of this report.

This article was originally posted on FX Empire

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