Shocking Report!
Anyone bullish on the US economy took a gut punch this morning.
Why?
The US Commerce Department revised their first quarter GDP reading to a year-over-year growth rate of -2.9%.
In other words, the US economy shrank by nearly 3% in the first quarter of 2014. That’s the worst performance for our economy in five years!
What the heck happened?
Mainstream media suggests the brutal winter played a huge role in decreasing economic activity. While I agree Mother Nature had something to do with the downturn, there may be something more nefarious going on.
Could it be the sharp pullback in Federal Reserve stimulus efforts is sending the US economy into the gutter?
Remember, the Fed started tapering $10 billion a month off their quantitative easing efforts in January 2014. In every meeting since the first of the year, they’ve tapered an additional $10 billion.
As it sits now, the Fed is buying $35 billion a month of mortgage-backed securities and long-term US treasuries. That’s down from $85 billion a month of purchases in December 2013.
Is it just a coincidence that economic activity fell off a cliff the same time the Fed cut back on their stimulus efforts?
Maybe. Maybe not.
All I know is, that’s a huge drop in economic activity to start out the year!
What does this shocking news mean for commodities?
Obviously, if US economic growth continues underperforming, it will be a bearish sign for oil and other economically sensitive assets. If the Iraq situation weren’t staring the market in the face right now, oil would likely be down heavily on this morning’s GDP news.
However, weak US growth, or worse, more contraction in the second and third quarter, will likely be bullish for precious metals.
Why?
If the US economy truly is going in the tank due to the sharp pullback in stimulus, Fed Chairwoman Janet Yellen will have to change course. I wouldn’t be surprised to see her stop tapering efforts if the Q2 GDP reading comes in weaker than expected.
And remember…
The most recent CPI reading came in much hotter than anticipated. Consumer prices rose by 0.4% in May, pushing the year-over-year inflation rate to 2.1%.
If the US economy is weakening while inflation is rising, we may have a case of stagflation on our hands.
What’s the point of all this?
Gold and silver just got more information to support a further rally. After last week’s big rally in the metals, the long-term odds may finally be back in the bull camp’s favor!
Until Next Time,
Justin Bennett
*** Editor’s Note*** I’m looking at low risk/high reward option trades that will benefit from today’s weak GDP reading in my Option Profit Pipeline service. Subscribers are getting new trades tomorrow. If you want to join us, click here.
Category: Commodity Trading
