US GDP fails expectations, but hopes are rising for the coronavirus treatment (Afternoon analysis 29.04.2020)

The US economy was expected to contract in Q1, but the data turned out to be well below consensus: a 4.8% decline is the greatest since 2008, while consumption fell the strongest in 40 years. The Gilead press release raised hopes for a drug for COVID-19, clearly improving sentiment in the afternoon.

Market ignores disastrous macro data

In the afternoon, the Bureau for Economic Analysis (BEA) published the anticipated US GDP data for the Q1. The GDP fell below expectations. The economy contracted by 4.8% q/q (annualised), recording the strongest decline since 2008, against 4.0% expected by economists. An even deeper drop was recorded in private consumption, which fell by 7.6% in January-March, which proved to be the strongest decline since 1980 (it was expected to fall by 3.6%). The data fit well with the market's underestimation of the impact of the pandemic on economies, not only in the USA. The impact of the virus will be more visible in the GDP data for the Q2, which is likely to be much worse.

The day before the publication of the eurozone's GDP data for the Q1, the Federal Ministry for Economic Affairs and Energy has published projections of what the largest European economy is potentially facing this year and next. According to current forecasts, the German economy will shrink by 6.3% in 2020, which would be the biggest decline since World War II (or at least since 1950). In 2021, it is already expected to grow by 5.2%. These estimates are likely to be modified with the inflow of further data allowing for a more accurate assessment of the depth of the recession. However, these disastrous GDP data today were somewhat overshadowed by a press release from one of the pharmaceutical companies.

Just before the publication of the US GDP data, Gilead Sciences announced that it had received positive data from the National Institute of Allergy and Infectious Diseases (NIAID) in the US about its antiviral remdesivir for treatment of COVID-19. NIAID is to give more details at a press conference, while Gilead is to provide more data on whether a 5-day treatment can be as effective and safe against coronavirus as a 10-day treatment. The second sample from this study is expected in late May.

Market sentiment after this information has improved significantly, especially in the equity market (increases in Europe by about 2% in the afternoon), the reaction of bonds and currencies was limited. However, the improvement in general sentiment limits the likelihood of supply pressure on emerging currencies. We do not know the details yet, but the market is reacting positively, as a potential effective treatment of the virus may change the expected path of economies emerging from recession. Knowledge on the existing drug would most likely increase, among other things, the tendency to consume or move, announcing a more steep growth trajectory. This, however, seems to be a distant scenario (given the minimum amount of information), but a scenario that the market is trying to price in.

Significant events that can increase market volatility today are the Federal Reserve's statement and its press conference. The market does not expect any significant modifications to the stimulus measures taken so far, so more emphasis may be placed on future Fed activities, which may be brought to light by its head Jerome Powell. However, we can expect potentially greater changes in the broader market tomorrow, when we learn a lot of macro data from Europe and also the European Central Bank's statement on monetary policy.

Zloty is supported by good sentiment, as well as by information about the partial lifting of restrictions in Poland in the first week of May. The USD/PLN exchange rate fell to around 4.18 and the EUR/PLN to around 4.54, although these changes were limited and were within the (narrow) ranges of the previous days. A more significant reaction can be expected tomorrow afternoon when we find out how much the eurozone economy shrank in the Q1 and whether the ECB will not disappoint market expectations (which would most likely be negative for the zloty).

Tomorrow's preview

Thursday will bring a relatively large amount of macroeconomic data from the eurozone, which will help to better estimate the impact of the pandemic on the economy. The data will include data on the GDP rate in Q1 in France (7:30 a.m.), retail sales in Germany in March (8:00 a.m.), the GDP pace in Spain (9:30 a.m.) and finally the dynamics of GDP change in the entire eurozone (11:00 a.m.). The median of economists' expectations indicates a 3.4% y/y and 3.7% q/q decrease in GDP in the eurozone in Q1. The macro data received so far suggest that the impact of the pandemic on the economies may be underestimated. If tomorrow's data were indeed significantly below expectations, it could weaken general market sentiment and negatively affect emerging countries' currencies, including the zloty. However, the biggest negative impact of the virus is expected in April, so the market may be more interested in the data for Q2.

At 1:45 p.m., the European Central Bank (ECB) statement will be published, and 45 minutes later, a press conference by Christine Lagarde, head of the ECB, will begin (for the first time by teleconference). Interest rates are unlikely to change. The market, on the other hand, expects an increase in the asset purchase program and its extension with the purchase of bonds below the investment level. If these are not taken into account, it may be considered as a disappointment, potentially lowering a general sentiment on the market. Tomorrow's changes will be the result of macro data and ECB actions. However, if publications from the economies are not significantly below expectations, market attention should focus more on the ECB.