(Reuters) - The U.S. economy contracted at its steepest pace since the Great Depression in the second quarter as the COVID-19 pandemic shattered consumer and business spending, and a nascent recovery is under threat from a resurgence in new cases of coronavirus.
U.S. stock futures, Treasury yields and the dollar slipped early Thursday after the Commerce Department said gross domestic product collapsed at a 32.9% annualized rate last quarter, the deepest decline in output since the government started keeping records in 1947.
The moves were extended after U.S. President Donald Trump raised the possibility of delaying the nation’s November presidential election, repeating unsubstantiated claims that mail-in ballots could lead to voter fraud.
The drop in GDP was more than triple the previous all-time decline of 10% in the second quarter of 1958. The economy contracted at a 5.0% pace in the first quarter.
STOCKS: S&P 500 e-mini futures extended losses a bit, last down 1.06%, pointing to lower open
BONDS: The 2-year U.S. Treasury yield was little changed at 0.1230% and the 10-year yield slipped to 0.5446%
FOREX: The dollar index turned 0.057%
AMBROSE CROFTON, GLOBAL MARKET STRATEGIST AT J.P. MORGAN ASSET MANAGEMENT, LONDON, UNITED KINGDOM
“Today’s US GDP release confirmed that the Covid-19 crisis brought about the fastest decline in US activity since the Great Depression, but to markets and investors this is now old news.
“The important question is how quickly will the economy recover? While we believe the worst is certainly behind us we think the path ahead will be bumpy as the economy battles to re-open without leading to a reacceleration in infections. The most recent high frequency data show the difficulty in achieving that balance - the pace of the recovery appears to have slowed in July as consumers are cautious of going out and spending amid high infection levels. Eighteen million Americans are still out of work and the enhanced unemployment benefits are due to run out tomorrow.
“With the economy far from ready to stand on its own two feet, it is vital that Congress approves a new support package in the coming days if the recovery is to be sustained.”
ELLIS PHIFER, MARKET STRATEGIST, RAYMOND JAMES, MEMPHIS
“I call it a cartoonishly large number and that’s what we got.”
“Everybody’s looking to all the positives we had and some of the growth that we’ve seen and some of the better-than-expected numbers that we’ve seen since, but then again we’re looking at the potential for more slowing.”
“Everybody expected these wild crazy numbers and we’re getting them and the (Treasury) market is kind of focused on ‘ok are we going to move ahead?’”
MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST AT JONESTRADING IN STAMFORD, CONNECTICUT
“The GDP number is not really a surprise. It’s been expected for some time. At this point its old news. It’s a horrible number but the quarter ended a month ago. Everybody lived it and experienced it. It’s a backward looking number.”
“The more important number is probably that initial jobless claims increased for the second week in a row for the first time since March.”
“The market first was down 1% because futures sold off in Europe overnight. That’s why we were initially down. The increase in claims just reinforces the fact that the economic recovery has leveled out,” he said, adding that “we could be rolling over again as we shut down more states and roll back the reopening.”
JACK ABLIN, CHIEF INVESTMENT OFFICER AT CRESSET CAPITAL MANAGEMENT, CHICAGO
“The economy declined by more than 32% on an annualized basis and that was better than expected, so you can take it as incrementally good news. This is an environment where I track a lot of high-frequency data nowadays, I’m watching the New York Fed high-frequency economic data, I watch COVID cases, I’m watching OpenTable and claims. This is probably the only period in my career where the Thursday weekly unemployment claims carries more weight than the previous quarter’s GDP number.
“One thing I can take comfort in is economists did have it pretty close to correct, they were able to gather a lot of chaotic data and assemble it in a way, at least for the quarter, seemed to be about right. I just have to laugh when I saw the number and said, ‘hey that is better than expected, that is going to be taken as good news.’”
RANDY FREDERICK, VICE PRESIDENT, TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“When you get to numbers that are that big, the amount that you’re off by two percentage points is really not that much. The fact that it was better than expected maybe is a good thing, but certainly not much better, and it’s still a terrible number.”
“The jobless claims numbers were very close to expectations. But it was the second weekly uptick, which I think is significant, because that really means that the initial claims have leveled off.”
“So each week 1.4 million or so new people are looking for unemployment assistance and that’s a huge number. It certainly is not a good sign because it’s not continuing to decline.”
MARC CHANDLER, CHIEF MARKET STRATEGIST, BANNOCKBURN GLOBAL FOREX, NEW YORK
“I’m kind of surprised that there’s been such a mild dollar reaction. The dollar has basically bounced post Fed, but the bounce is relatively mild.”
“I think that the GDP number is really old news in the sense that everybody knew that it going to be horrible. And the exact number on horrible, I’m not sure how much that matters. Instead I was surprised that there was such a little reaction to the jobless claims second weekly increase, and the continuing claims rose for the first time in a week. This has made the U.S. yields basically at record lows, the two-year, the five-year and the 10-year are all near record lows. So I think this is going to keep the dollar under pressure, but we’ve really seen a really mild reaction.”
RUSSELL PRICE, CHIEF ECONOMIST, AMERIPRISE FINANCIAL SERVICES INC, TROY, MICHIGAN
“The market probably is reacting to the claims number more than the GDP report. Futures already were down before these reports. The GDP numbers were already largely expected to be very, very bad. But the market was already viewing this report in the review mirror, and quite frankly, good riddance.
“Most of the (GDP) numbers that I’m looking at were generally in line with expectations. But it provides a low bar for growth in the second half of the year. What the market is responding to is the fact that new claims for unemployment ticked up for the second straight week, and continuing claims remain very, very high as well.
“GDP was horrible, but it was fractionally less horrible than expected. The claims report is what’s more worrisome because it shows that the recovery that had been showing strong numbers from early on in May and June has now stalled and maybe even reversed a little bit because of the surge in new COVID-19 cases.”
ERIK BREGAR, HEAD OF FX STRATEGY, EXCHANGE BANK OF CANADA, TORONTO
“The GDP number is not surprising and I don’t really think markets care. This is old news. But my gut feeling is that there is no V-shaped recovery coming. A quick look at the bond market today tells you that things are going to get worse, not better.
German Bunds are trading at two month lows. U.S. 10-year yields are also trading lower. If the bond market and the banks which are huge participants in that market bond believe that they are going to see a V-shaped recovery, then yields would be trading much, much higher.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“(GDP) came in close to consensus, but obviously it’s a historic decline. And if you look at consumer spending, it was off 34.6% and PCE prices were down 1.9%. These are historic numbers.”
“Of course this is old news, but what does it mean going forward? The numbers so bad that while recovery is on the way, the new impact of coronavirus cases could stall the recovery.”
“But this was baked into the market. We had a warning from the Fed yesterday that the economy will depend on the course of the virus. With that in mind with the new cases it will be an even slower recovery that we anticipated.”
“We also saw jobless claims rise and that ‘s probably even more of a problem. It’s an indication that the economy is slowing.”
PRIYA MISRA, HEAD OF GLOBAL RATES STRATEGY, TD SECURITIES, NEW YORK
“We have been in the 60-80 basis point range on the 10 year (U.S. Treasury note) since March. There was some hope we could back into that range if the data was good, and it was not. Today’s data shouldn’t change the Fed’s position.”
“Nothing in the data today should make the Fed not want to ease. That’s why we’re still pricing in the easing in the session. The data confirms their need to add more accommodation.”
Americas Economics and Markets Desk; +1-646 223-6300
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