Mixed first quarter sets stage for volatile year

U.S. GDP sends mixed signals

For the first time since the early stages of the pandemic, U.S. GDP stumbled to a contraction of 1.4% annualized during the first quarter. Far from the 1% growth that was expected, many participants explain this contraction as a result of technical factors. A sharp reduction in private inventory investment and a wider trade deficit appears to be the culprit. The surprising GDP decline shouldn’t cause panic, according to some experts, due to strong economic fundamentals.

Despite the highest inflation figures in over 40 years, March consumer spending grew 1.1% according to Friday’s report from the Department of Commerce. Consumer sentiment, although still lower than pre-pandemic levels, rose by 10.6% from March to April as measured by the University of Michigan. While pandemic pressures have sent employee turnover to record levels, the strong labor market also points towards economic optimism. Initial jobless claims this week declined to 180,000, unemployment sits at 3.6%, and the number of Americans collecting jobless benefits hit a 50-year low.

Some experts point to persistent inflation, global supply chain issues, and geopolitical instability as reasons to be cautious. This quarter’s reversal, from the previous quarter’s growth rate of 6.9%, blurs year-end expectations. With many factors uncertain, experts agree that volatility is to be expected. The CBOE Volatility Index reached its highest level since mid-March earlier in the week.

(Related insight: Read, “How to maintain treasury proficiency and continuity amid the “Great Resignation’”)

U.S. dollar strengthens

After riding off its best monthly performance in a decade, the U.S. dollar has proved again to be the global shelter in a storm of volatility. The U.S. dollar reached a 20-year high per the Intercontinental Exchange Inc.’s dollar index, which pits the U.S. dollar against a basket of developed foreign currencies. Expectations of aggressive domestic interest rate hikes and weakening global currencies have been the spark.

In particular, the Bank of Japan’s Thursday comments to solidify an ultra-low rate environment by buying an unlimited amount of its 10-year government bonds triggered a sell-off that dropped the yen to a 20-year low against the dollar. The Euro also hit a 5-year low against the dollar at the end of the week from growth concerns and Russian disruptions.

The further divergence of tight and loose global monetary policy is expected to widen interest rate differentials. The Fed is not expected to slow down this year. As of Thursday, CME Group predicts a 51% chance of rates falling in the 275-300 bps range by year-end. Interest rate differentials and the volatility of FX rates prompted many corporates to review and adjust their hedging tactics in this fast-paced, and uncertain, environment.

(Related insight: Read, “7 ways to maximize FX and commodity hedging impact while minimizing costs”)

Commodity update

In just over a month, diesel fuel has reached another new high. The national average shot to $5.16/gallon last week. With few substitutes, concerns of falling inventories and further escalations in Russia/Ukraine have compounded the price pressures. Some experts state the rising prices will be economically detrimental as diesel powers the supply chain. Due to its chemical structure, refining capacity cannot be easily created out of the blue. Diesel is up 42.8% from the start of the year per the Department of Energy.

(Related insight: Register for the webinar, “Staying Cool Amidst Commodity Volatility”)

The week ahead

The U.S. will see a full week of fresh labor statistics. Job openings, job quits, jobless claims, nonfarm payrolls, unemployment rates, and the participation rate are planned for release. A rate hike is also more than expected. Markets will closely tune into the FOMC meeting and Chairman Powell’s statements on Wednesday, May 4. Developments out of the Russian invasion of Ukraine are expected to keep markets alert.