The US Economy Is In Worse Shape Than We Thought

WHERE WE STAND – Well, here we are then, a third of the year ‘done and dusted’ already, although I think most will agree that the first four months of 2025 have felt more akin to four decades!

Given that May is now underway, the old adage of ‘sell in May and go away, don't come back until St Leger's Day’ is getting a workout once more.

I’d never trade solely on seasonality, and especially not on what’s essentially an ‘old wives’ tale’, but the balance of risks does tilt in favour of that saying ringing true this year, given the huge degree of trade uncertainty, chunky downside economic growth risks, and considering how the recent relative calm on the tariff front seems to have lulled investors into a bit of a false sense of security. Rally selling in equities remains my preferred play.

That’s enough market clichés for one day, though, especially given how busy yesterday’s data docket was, and how the last time I went down that path I made a pig’s ear of the famous phrase about irrationality and solvency, instead noting that ‘markets can stay irrational longer than folk can stay sober’. I prefer my version, to be honest!

Anyway, just 101 days after President Trump proclaimed that the US will “once again consider itself a growing nation”, data showed that the economy contracted by a larger than expected 0.3% on an annualised QoQ basis in the first quarter. As expected, this contraction was largely driven by a surge in imports, as businesses ‘front-ran’ the imposition of tariffs, though was also accompanied by a much hotter than expected core PCE deflator – 3.5% vs. 2.6% prior – in turn painting a rather grim, stagflationary picture.

Apparently, though, according to Trump adviser Peter Navarro, this was the best negative GDP print he’s ever seen. Sadly, my honest reaction to his stance isn’t one that’s appropriate to be printed.

While the Q1 GDP data could’ve been a lot worse, one must recognise that the figures reflect just the uncertainty, and front-running of tariffs before they were imposed. Hence, things are probably likely to get considerably uglier in the second quarter, when the actual impact of tariffs takes a huge chunk out of profits, and economic activity freezes up amid the incoherent nature in which policy is being made. Not only that, but we also start Q2 from a much lower base in terms of growth, and much higher base in terms of inflation, than we’d been expecting. All told, pretty grim.

Taking that into account, and adding in a surprisingly soft ADP employment print, it should come as no surprise that sentiment soured rather significantly in the aftermath though, of course, a small ‘pinch of salt’ is needed here given the usual month-end nonsense in the mix as well. That aside, stocks slipped across the board before paring losses into the close, while havens such as the JPY, CHF, and gold all found notable demand. Interestingly, the dollar failed to benefit from participants seeking shelter, again finding itself in an unfavourable position being the asset that is most exposed to the recession worries that participants are trying to hedge against.

That Treasuries failed to find demand as investors darted for cover was interesting, though I suspect that this owes primarily to the strong whiff of stagflation which accompanied the GDP figures. Again, EoM flows could well be skewing things here, but given the extent to which we’ve rallied over the last couple of weeks, I’d not be at all surprised to see a further retracement, and extension of some of this recent downside, depending of course on what Friday’s jobs report may have to say.

LOOK AHEAD – Another busy day ahead today.

On the data front, focus will fall primarily on the latest ISM manufacturing PMI figures out of the US, with the index set to fall to 48.0, from a prior 49.0, though risks clearly tilt to the downside given other survey prints, and the headwinds posed by huge economic uncertainty. The employment component of the index will be used to shape expectations for tomorrow’s NFP print, though that can’t be said of the weekly jobless claims stats, with neither the initial nor continuing prints pertaining  to the April NFP survey week.

Meanwhile, another jam-packed corporate earnings slate lies ahead. Figures from Amazon (Consensus sees Adj. EPS $1.36, Qtrly Revs $155.2bln; options price Exp Move +/-6.2%) and Apple (Consensus sees Adj. EPS $1.62, Qtrly Revs $94.5bln; options price Exp Move +/-4.0%) are the obvious highlights, though other notable reports come from the likes of Eli Lilly, Mastercard, and McDonald’s.