Is Recent Economic Data as Good as it Seems?
The advance estimate of 3.2 percent U.S. first quarter GDP growth exceeded all expectations. But the details of the report were not quite as encouraging as the headline would suggest. Unsustainable strength from inventory rebuilding and improvement in trade contributed a combined 1.7 percent to the quarter’s growth rate, while both personal consumption and business investment slowed. Overall, real final sales to domestic purchasers slowed to a 1.4 percent annual rate, its slowest since the fourth quarter of 2015, after averaging 2.7 percent over the previous four quarters. Nevertheless, it was a noisy quarter that included the government shutdown, trade talks, poor weather and Brexit. And conditions improved throughout, suggesting that the second quarter began with a certain degree of momentum, especially among consumers as evidenced by the strong March retail sales report and anecdotal evidence from automobile dealers.
What Does Low Inflation Mean for the Fed?
The GDP report also showed that inflation remains in the witness protection program. The core Personal Consumption Expenditure (PCE) deflator fell to an annualized pace of just 1.3 percent, its lowest in almost two years. The Federal Reserve meets this week and is almost certain to take no action. Following the GDP report, the odds of a rate cut by year-end increased modestly, currently at a 41 percent probability according to the CME FedWatch tool. Yet, despite the absence of inflation and the drop in bond yields, the yield curve actually steepened, as the short-end fell more sharply. The two-year Treasury note yield fell nine basis points to 2.31 percent, and the two to ten-year curve steepened to 21 basis points, still quite shallow, but the steepest since late November and the first time above the 200-day moving average in two years.
It was a robust week of earnings reports, with the result that first quarter aggregate expectations continued to improve. According to Factset, with almost half of the S&P 500 having reported results, the anticipated blended growth rate is now -2.3 percent, an improvement from the -4.0 percent expected at the end of the quarter. Another one-third of the index is scheduled to report this week, including bellwethers Alphabet and Apple.
Investors Watching Global Economic Data this Week
In addition to earnings, the global economic calendar is loaded this week. In the U.S., on Monday we learn about March personal income and spending, followed by pending home sales and consumer confidence on Tuesday. On Wednesday, in addition to the Fed decision, we get reports on manufacturing, construction spending and motor vehicle sales. And on Friday we get the April jobs market report, which is expected to show another month of solid growth with 190,000 new non-farm jobs created, according to the Bloomberg consensus. In China, the headline report will be the April PMI for manufacturing, which is expected to be in-line with the March rebound, which followed three straight months of contraction. It is a busy week for Eurozone data as well, including Q1 GDP, and inflation and retail sales figures for March.
And finally, trade talks between the U.S. and China are scheduled to resume this week in Beijing as both sides apparently edge closer to an agreement.
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Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time.
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- Chief Market Strategist, Ameriprise Financial
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