Virus deepens the US trade deficit (Afternoon analysis 28.04.2020)

In March, imports of vehicles and consumer goods in the US fell sharply - one of the consequences of the pandemic, which is likely to worsen in April, affecting the GDP. The zloty is weaker later in the day as the dollar and the franc pare some loses.

US consumers in retreat

Another day with positive sentiment on the market. The main market indexes in Europe grew by more than 2% when trading on the New York Stock Exchange started today, reaching their highest levels in a month and a half. The European Central Bank's publication, which briefly eases credit requirements for banks, supported positive sentiment. Although there was nothing unexpected in this publication, it fitted well with sentiment, particularly supporting the financial sector.

In the afternoon, the Census Bureau published the US foreign trade balance data in March. The deficit of 64.2 billion USD (seasonally adjusted) was by 9.2 billion USD higher than expected. In the current situation, the trade balance is less important for the market than usual, so its impact on today's quotations is expected to be limited.

However, trade data on the month already affected (to some extent) by the pandemic illustrate well how the virus struck the economy and what should be expected in April. Exports of beverages and food from the USA to the rest of the world remained practically unchanged, and their imports even increased slightly (by about 0.5 billion USD). However, the data for March already show a lower demand for vehicles, whose imports fell by about 2.8 billion USD (slightly more than 9%), while their imports fell by 18%.

During the time of significant restrictions imposed on citizens and increased unemployment (this week probably about 30 million Americans), the import of consumer goods decreased by about 8%. April will most likely deepen these effects, which may ultimately have an even more negative impact on the US GDP in the Q2.

Half an hour after the session began in the USA, the Conference Board published slightly more recent data, i.e. the US consumer confidence index in April. It fell to its lowest level since 2014, reaching 86.9 points. Despite such a low reading, it is only 0.1 points below what the market expected, so the impact is likely to be limited. However, the 28% month-on-month drop in the sentiment index shows how strong the effect of the virus has been on consumer behaviour (and consequently on the GDP).

With the end of the session, the dollar pared the losses, e.g. to the euro: the EUR/USD quotations went back from the day's highs around 1.0890 to 1.0830 - in an hour and a half after the start of the trading session in the USA. The zloty remained slightly weaker today, and because the dollar and the franc pared some losses, this effect was slightly increased. The EUR/PLN exchange rate exceeded 4.55, and the CHF/PLN reached approx. 4.31 (Monday's high) - however, changes are still limited given the last few days. Stronger fluctuations in the zloty's valuation against the main currencies can be expected in the following days due to the statements and conferences of the US and eurozone central banks, as well as the publication of the GDP of these economies.

Tomorrow's preview

Wednesday will be one of the most significant days this week. At 2:30 p.m., the Bureau for Economic Analysis (BEA) will publish a preliminary reading of the (most likely) GDP decline pace in the Q1. The median of expectations indicates a drop of 3.8% q/q (annualised). However, in the case of such a strong economic slowdown, the result may deviate from expectations even more than usual (similarly to its later readings when BEA will receive more data).

Nevertheless, significant fluctuations around this publication are likely to occur. Even though the market seems to be looking ahead to the future now, and the data for the Q1 include only a period of a less than a month of "lockdown", so a greater focus will still be placed on the data for the Q2. The data for the recent quarter may significantly worsen the optimistic sentiment in the broader market if they substantially deviate from the consensus, which may eventually weaken the zloty.

In the evening, at 8:00 p.m., another important event for the market - a statement after the FOMC meeting. The Federal Reserve Monetary Committee is unlikely to make drastic changes to the monetary policy instruments themselves (interest rates are to remain unchanged). For the market, something which may be even more important during the evening may be what the Fed's Chief Jerome Powell will have to say. The Fed has not published its economic projections, so Powell's expectations of the economic situation may have an even greater impact.

So far, the Federal Reserve has stated that negative interest rates are not an option. Investors will be interested in whether this statement will be completely ruled out or whether Powell will offer a slightly milder approach to negative rates (lower probability). Around the publication of the statement and the press conference with Powell, we can expect significant fluctuations of the dollar (and in the broader market), although for more significant changes in valuation we should wait until the next day (the statement and conference of the ECB, GDP in the eurozone).