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US economy shrinks

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The preliminary GDP data for Q2 in the United States was released yesterday, with the figure coming in at -0.9% YoY

This is a figure below market estimates and, more importantly, marks another quarter with a drop in GDP, which, if confirmed, would mean that the US economy entered a technical recession.

 

After knowing this data, the forecasts on the interest rates evolution in the United States have lowered considerably. Moreover, the day before, Chairman Powell had already announced that the next steps of the Federal Reserve would depend on economic data. The first data published after his statements pointed to a sharp economic slowdown threatening a recession. Today other relevant data will be published, including personal consumption spending, an inflation metric which is the additional problem the Fed faces. If the inflation data is somewhat weaker, expectations about future interest rates may recede significantly.

 

Following the GDP data for Q2, the treasury bond yields experienced a considerable drop. The 10-year bond went down to 2.68%, the lowest level since April 2022. The market is beginning to bet on a less aggressive action by the Fed, probably even below previous expectations of 3.5%.

 

As a result, the US Dollar weakened after the figure, especially against the Yen, falling more than 200 pips during the session.

 

On the other hand, stock markets reacted higher. Paradoxically, a poor economic growth figure that should initially be taken as negative for stock market indices is interpreted positively by investors if it limits interest rate hikes by the Fed.

 

The hikes have been the main fundamental factor causing markets to continue to sell off throughout the year’s first half. At the close of the session, the earnings of two of the big technology companies, Apple, and Amazon, were published. In the case of Amazon, earnings expectations were exceeded, and the stock rose more than 10% after the close.

The Nasdaq index traded above the 100-day moving average and is close to the 12,947-resistance level. From a technical point of view, it could exit the bear market if it breaks the resistance level.

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Sources: Bloomberg, Reuters 

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.