(ATF) US GDP shrank 9.5% quarter-on-quarter in the three months to the end of June (32.9% on an annualised basis). It was the worst such drop since 1947.
There certainly will be a significant turnaround in the third quarter, but it surely won’t be as dramatically V-shaped as White House economic adviser Larry Kudlow would have us believe (see Fox News Sunday).
Weekly unemployment claims reported Thursday came in at 1.43 million, the second weekly increase in a row. Continuing claims rose by a large 900,000. The coronavirus continues to rage in numerous populous states with little sign of abating and jobs and economic activity numbers show it.
In sharp contrast, China had largely overcome Covid 19 by the start of the second quarter and grew by 11.5% qoq or by more than 50% on an annualised basis.
Latest manufacturing and non-manufacturing PMIs released Friday morning by the National Bureau of Statistics pointed to a continued strong recovery in July with readings of 51.1 and 54.2, respectively. Construction with 60.5 led the way indicating a construction boom.
The massive contrast in US and Chinese economic fortunes is only partially reflected in the USD-CNY exchange rate. The yuan is de facto tied to the US dollar by the fact that the People’s Bank of China (PBoC) permits only a +/-2% variation around its central parity rate, which is set every morning.
Today, that rate was set at 6.9848, its strongest since July 22.
But the relative weakness of the US currency shows very clearly on the dollar index (DXY), where it is trading with a 92 handle for the first time since May 2018. It stood at 92.8610 at 6pm HK time.
Equally telling is the fact that – as we had forecast – gold resumed its recent climb and stands at $1,995, up 1.45% on the day.
The euro is trading with gold and, at 1.1860 against the dollar, is at its strongest since May 2018.
The apparent utter inability of the US to come to grips with the coronavirus pandemic prolongs the economic shock to the US economy and the need to go deeper and deeper in debt undermines US dollar fundamentals.
The dollar decline is here to stay.
Gold is an adequate hedge. Chinese and Korean tech stocks are the better bet.
