Markets closed weaker on Wall Street this morning and the Aussie dollar was higher after the US Federal Reserve admitted the American economy had lost juice, and data revealed it had, with March quarter growth coming in at a hard to believe annual rate of just 0.2%.
The Dow lost 0.4%, Nasdaq, 0.6% and the S&P 500 fell nearly 0.4% on a day when the weak state of the US economy was confirmed by the first quarter GDP report and the Fed’s latest statement.
That should have boosted confidence with a rate increase pushed further out, instead it was gloom all round.
But the weak economic news was enough to drop the value of the greenback, push the Aussie back over 80 US cents, and send Wall Street lower. Earlier European markets had sold off heavily for a second day in a row with losses on some bourses above 2% on the day.
Iron ore’s rally came to an abrupt end overnight, with a 4% plus drop overnight. Iron ore at the Port of Qingdao fell $US2.75 to $US57.13, a tonne.
That will feed into a very uncertain local market – the overnight futures market was down 48 points or so, and after yesterday’s 109 point plunge (1.9%) on the ASX 200, it looks like being another miserable day and investors and a rotten end to the month.
The stronger Aussie dollar, receding chances of a rate cut next Tuesday from the Reserve Bank and now the sell off in Europe and the weakness in the US economy and markets will all make for a tough day.
The post-meeting statement after the Fed’s two day meeting in Washington confirmed the bearish feelings ignited by the GDP report earlier in the morning.
The combination of the two events – the GDP figure and the Fed statement – saw markets lengthen the timing of the first rate rise in the US since 2006. Some economists now see no rate rise at all this year, others are more circumspect, believing if it does happen, it will be the final quarter.
They point out that the GDP reading was too gloomy and will almost certainly be revised upwards as more data on trade and personal income for March and the quarter becomes available in the next few weeks.
But even if it is, the revisions will likely take the reading back towards the market estimates for growth of around 1% to 1.2% for the quarter, which is a significant slowing from the 2.2% annual rate in the December quarter and that surging 5% rate in the September quarter, which quickly vanished.
The US economy grew at an annual 2.4% in 2014, and even if there is a revision, it is clear the economy has “slowed” as the Fed put it in this morning’s statement.
After six years a slowing in the US recovery is to be expected – but what comes next is the question – a dip, a plateauing while it searches for new strength – certainly the chances of another solid rebound are unlikely for the next quarter or three.
If that’s the case then the US will slip below trend and capacity, joining economies around the world – from Australia, to China in sluggish growth. The strongly performing UK economy slowed to just 0.3% (quarter on quarter) growth in the first quarter.
Only the eurozone economies are growing moderately well, and the problems with Greece are threatening that!
US economy grows just 0.2%
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Certainly the two statements – the GDP report and the Fed’s commentary were not at odds.
The Fed said the economy had lost momentum and the pace of jobs growth had slowed.
The central bank said that growth had “slowed” during the winter months reflecting “in part” transitory factors (another very cold winter for one), while growth in household spending had dropped even though there had been a strong rises in real income.
The strong dollar and falling activity in oil producing states also had an impact on GDP.
But the Fed said that despite this weakening in output and employment growth it still expects activity to expand at "a moderate pace".
While the Fed in March nominated June as the first possible month for a rate increase, removing its pledges to be “patient” about rate increases, chairwoman Janet Yellen has insisted this does not mean the central bank is impatient to tighten policy.
And in fact Fed officials have taken a more cautious tack in recent weeks as more and more data have confirmed the slowing pace of activity, especially the weak jobs report for March which was a real shock.
In this morning’s statement the Fed did not rule out a June move, but given the weakness of the data, that looks unlikely. But next week’s jobs report for April could end up being quite telling – another weak report, then no rate rise. But a rebound in hiring and a June increase could be back in the mix.
But the Fed also reiterated that it would be appropriate to raise rates when it has "seen further improvement" in the labour market and economy.
And cost pressures in the economy remain weak, the Fed pointing out that inflation continues to “run below” its 2% target, and that that market inflation expectations remain low.
