Why the GDP Number Thursday May Be a Lose/ Lose Situtation

The US reports its Q3 GDP number Thursday. The current estimate is for 3.2% growth. This is almost 4% above the Q2 result of -.7% growth. This should be great news! Even a slight disappointment should be great news. How would it not be?

First, the US equities markets are toppy at the moment. They are really looking for an excuse to retrace. They are up about 60% from the March 2009 lows. Commodities have risen dramatically lately too. Oil is over $80. If it goes much higher, it will seriously impact any chances of a worldwide economic recovery. Gold has gone up dramatically too, but there are no big signs of huge inflation yet. In fact the signs of deflation abound. The housing market is still troubled. The commercial real estate market is apparently in bigger trouble. There is no reason to believe a dramatic increase in prices is imminent. Gold’s intrinsic value is only about $700/oz. The rest of the current price is speculation on inflation. It is toppy without further strong signs of inflation.

If the GDP number Thursday comes in below estimates, the US equities markets will likely react negatively to the fact that growth is not as strong as people were hoping. The Chinese markets (FXI) will follow suit because a non-growing or slower growing US economy will buy fewer Chinese goods (i.e. negatively impact the Chinese economy).

If the GDP number Thursday comes in at or above the estimates, US equities markets may likely still go down. Why, you ask? The explanation comes from the above described toppiness of the equities markets, the toppiness of the commodities markets, and the likely response of the USD Index to a better than expected GDP number. If the GDP number is at or above the estimates, the USD Index will likely go up. The USD will strengthen against other currencies. When that happens commodity prices will fall dramatically because they are USD denominated. The commodity related stocks (energy and materials) will consequently fall. This should bring the rest of the market down with it. The fact that the USD Index is already bottoming against several currencies should only help this scenario.

On top of this there is the carry trade consideration. If the GDP number is good, it will mean the US economy is doing better. People will see it as a sign that the USD is likely to strengthen soon. This will mean immediate term losses to those who have borrowed the USD at low rates to invest in something else. It will mean some people will sell those other assets in order to repay their borrowed USD monies. This selling, which will not be negligible, will likely cause the US equities markets to go down. Hence you have a lose/lose situation.

Some might argue that a good or great GDP number should make commodities go up as there will be more demand for them in a growing economy. I would tend to agree with this sentiment in general. However, the current toppiness of most commodities makes the likelihood of movement for this reason much lower. Instead coupled with the "bottoming" of the USD against other currencies, commodities are likely to go down on the subsequent rise in the USD as their prices are USD denominated.

The SPY chart below indicates the toppiness. Charts of many commodities are similarly toppy.



Disclosure: The author has no current position in SPY or UUP.

Comments

[untrusting investor]

Yes. As per your bolinger bands, the downward correction should move close to the bottom of the band as it has done in most other selloffs. The bigger risk is if volume of the selloff is high, it could move the downside even lower.

2009 Oct 27 12:50 AM

[Dave Wrixon]

The problem is that the Believability Factor is looking a bit toppish in most people's eyes. If it comes in on target, I for one will discount it. A measure of the economy that falls less dramatically than in competitor economies that are not so directly affected by the crisis and the recovers strongly despite all the evidence that the real economy is still contracting, despite being bolstered with oceans of free cash, really does say anything to me, apart from the fact the whole edifice of government is totally corrupt.

2009 Oct 27 06:27 AM

[User 483248]

I just want to say what a great site this is! I don't know where else on the site I can post my appreciation.

2009 Oct 27 01:17 PM

[David White]

After the spate of what is now apparently 4 down days in a row, the equities markets could rally on a good GDP number (and good unemployment numbers). The SPY has some support at about $104.45 on the SPY. There is further support at $104.23. At the time this article was originally written, there was not the psycological or technical support for a rebound move.

2009 Oct 28 01:04 PM

[jeremiah74]

i think what happens to the markets, depends on positioning.. the GDP number release will just mark the time of the day when the action will start.. we can drop on a good number or rally on a bad one.. it all depends on what flows there will be in the market today. and if stocks go up, people will sell the dollar, not because it makes sense, but because thats been the trend and there is hence a pavlovian reflex of selling USD when stocks go up or are expected to go up.

all in all i agree with your general view: stocks + commodities down. bonds + dollar up

2009 Oct 29 06:56 AM

[Schneidehouse]

Well, the response was the exact opposite of your prediction in the USD. At 8:30 the USD was 1.4722 and as I write this at 8:55 it is now 1.4785. GDP was 3.5%, slightly above estimates. We'll see how well you do during the day.

2009 Oct 29 08:57 AM