US economy shows unexpected contraction in Q1

• The US economy shrank -1.4% q/q in the first quarter on an annualised basis (-0.4% unannualised), an unexpected contraction from the world’s largest economy. Consensus predictions had seen US GDP expanding by 1.0%, and the miss has raised fears that the global economic outlook is even more concerning as had been supposed as countries are buffeted by high inflation and persistent supply chain disruptions. However, when looking at the drivers of the contraction there is less cause for worry given that it was a surge in imports that was largely responsible for the decline (compounded by weaker inventory growth) underlining how the all-important US consumer remains in good health. Indeed, sales to private domestic purchasers expanded 3.7% and net imports exerted a drag of 3.2 percentage points on GDP. With the trade balance clearly tipping further in the US’ deficit, President Biden called for improved supply chains and for more to be made in America, while at the same time cheering the GDP figures and calling the contraction a technicality.
• With the first quarter data also impacted by the Omicron wave which hit at the start of the year, there is likely insufficient cause for the FOMC to change course from its signposted more aggressive rate hiking over its next several meetings on the back of these figures. The US labour market also remains in good health, removing any potential reason for the Fed to look to the other pole of its dual mandate. Initial jobless claims in the week to April 23 came in at 180,000, in line with expectations and down modestly from the previous week’s 185,000.
• Algeria has threatened to cut its gas exports to Spain in another potential risk to European energy supplies. Spain has mooted re-exporting natural gas to Morocco, a red-line for Algeria, although Spain’s plan would not involve North African or European gas, according to energy minister Leila Benali.

Today’s Economic Data and Events

10:45 France CPI inflation, % y/y. Forecast: 5.1%

13:00 Eurozone GDP Q1, % y/y. Forecast: 5.0%

Fixed Income

• US Treasuries weakened at the start of the US session even as data for Q1 showed a surprise contraction in US economic activity. Yields on the 2yr UST traded in a range of more than 10bps, closing the day up almost 3bps at 2.6173%. On the 10yr, the pull higher in yields was faded by the end of the day with yields settling down marginally at 2.8224%. Trading is closed in the early session today as there is a public holiday in Japan.
• European bond markets closed more solidly in the negative with yields rising across the board. In the bund market, yields on the 10yr rose 10bps to 0.895% while the 10yr gilt yield added more than 6bps to 1.874%.
• Emerging market bonds generally closed weaker with a handful of exceptions. South African yields settled up 13bps higher at 10.376% while Indian 10yr bond yields added 7bps to close at 7.151%.

FX

• A sharp sell-off in the yen pulled momentum from all currency markets, helping to propel the US dollar higher. The Bank of Japan is showing no signs of wavering from its yield control policy which invariably will keep the yen weak against peer currencies. USDJPY closed above 130, up almost 1.9% overnight, its weakest level in 20 years. EURUSD was also caught up in the selling, falling by 0.55% to just shy of 1.05 while GBPUSD dropped 0.7% to 1.2457.
• In commodity currencies USDCAD managed to be the best of the bunch by holding relatively steady at 1.2808. AUDUSD dropped 0.4% to 0.7097 and NZDUSD fell more than 0.8% to 0.6490.

Equities

• The day started on the front foot, with the Shanghai Composite adding 0.6% on the back of more support promises from the PBOC, while the Nikkei added 1.8%.
• In Europe, the CAC, the FTSE 100 and the DAX added 1.0%, 1.1% and 1.4% respectively.
• US equity markets looked through the headline contraction to what was otherwise a relatively encouraging Q1 GDP print, with all three major indices closing the day higher. The NASDAQ led the pack with a gain of 3.1%, followed by the S&P 500 (2.5%) and the Dow Jones (1.9%.

Commodities

• Oil prices closed higher overnight with Brent futures adding 2.2% to USD 107.59/b and WTI adding 3.3% to USD 105.36/b. Markets remain in a holding pattern until a clear policy response from the EU emerges with respect to their stance on importing Russian oil. Germany’s vice-chancellor, Robert Habeck, said it wouldn’t “stand in the way” of a EU-wide embargo on Russian oil, signifying a shift in position.

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