The Daily Market Report: Gold Underpinned by Weak Dollar After U.S. GDP Disappointment

29-Apr (USAGOLD) — Gold remains fairly well bid in the wake of this mornings GDP disappointment. The yellow metal is being underpinned by a weaker dollar and rising risk aversion.

U.S. Q1 GDP came in well below expectations at just +0.2%. Consensus had been running around +1.0%. We suggested in yesterday’s DMR that the Atlanta Fed’s GDPNow forecasting model was probably closer to the truth, and it was in fact just about spot on.

Exports got crushed in the first quarter, dropping 7.2% y/y. The rise in the dollar to 11½-year highs in Q1 was largely to blame, as talk of an impending Fed rate hike intensified.

Capital expenditures plummeted by 2.5%. It was the biggest drop since 2009.

If it weren’t for the huge 0.74% inventory build (biggest ever), Q1 GDP would have been negative. Final sales were in fact -0.5%.

The bad news is that the inventory build will now take away from Q2 GDP; and we’re already seeing some negative revisions. Deutsche Bank’s Joe LaVorgna nearly halved his Q2 estimate from +4.0% to +2.5%.

When the Fed announces policy later today, they really should address the weak growth with something that is more overtly dovish. Perhaps a more forceful emphasis on the data dependency of any movement on rates.

I think it is safe to say that a June hike is off the table, even though I’ve never really felt that it was on the table. The last thing the Fed wants to do is intensify the growth risks at this point by suggesting policy remains unequivocally on a divergent path with the rest of the industrialized world.

In light of the sharp drop in exports and widening of the trade gap, something should also be said about the dollar. The Fed has been sitting on its hands for about a year now as the ECB and BoJ have debased the euro and yen respectively. Now that the impact of dollar gains are hitting the economy, the Fed should do something to cap the greenback.