Week End Blog – US Economy Grinding to a Halt

A very ‘compact’ Week End Blog on Labor Day to get your weekend going. Big news out of the US. First quarter GDP growth came in at a ‘whopping’ +0.1%. To make things worse, this number is annualized! Consumer spending was ‘ok’, but business investment and trade made the US economy grind to a hold.

Interestingly, the first quarter has been notoriously weak in recent years. Yes, weather related effects have played their part, but some questions about the GDP methodology have popped up. Anyway, since 2010 first quarter GDP growth averaged 0.6% against an average of 2.9% for all other quarters.

Things could turn out even more ugly though, as we have some GDP revisions to go. Personal spending came in lower than expected in March and could drag the GDP number lower. On a yearly basis consumer spending was the slowest since 2010.

Consumer confidence also disappointed. Instead of a further rise, consumer confidence dropped to a four-month low in April adding to the uncertainty about the strength of the recovery. That said: despite the big miss on US confidence, global consumer confidence has improved quite a bit.

The Fed seems rather unmoved by the disappointing macro data of late. In a cautiously hawkish statement, Yellen hinted that a first rate hike this year is still very much possible. Everything being totally data dependent, of course.

Moving over to Europe where UK GDP growth also disappointed. That must have hurt David Cameron who is claiming that the Conservative Party is the best choice for the economy.

But UK GDP growth was soon forgotten! After months of declining yields, Eurozone bond yields shot up massively. The German 10-year bund yield rose from a low of just 0.05% to 0.36% currently.

Perhaps solid economic data from the Eurozone caused the reversal. Next to that, the ECB stated that the downward trend in inflation expectations was finally broken. Also noteworthy is the fact that for the first time since 2012 Eurozone bank lending has grown on a year-on-year basis. Still, I think the sudden rise in yields has a lot to do with technicalities and positioning which could easily result in some kind of short squeeze.

The power of central banks is not to be underestimated, though. Something that is neatly demonstrated by the ‘slope’ of the Swiss sovereign yield curve. That looks just weird.

To conclude: Labor Day coincides with one of the most well-known anomalies in financial markets. Sell in May has arrived! Below a chart that shows that the Sell in May effect has been pretty significant and consistent over time.

Enjoy your weekend!


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