The headlines of the initial estimates of first quarter GDP were ugly. GDP rose at a 1.6% annualized rate, below all projections. What was perhaps more disturbing were the pricing pressures. A closely watched measure of underlying inflation advanced by 3.7%, also exceeding all estimates.
Is stagflation at hand?
Both the equity and Treasury markets were rattled by the data. The Dow has almost erased all gains for the year. The once unstoppable NASDAQ is closing in to break even for the year.
The 10-year Treasury rose to 4.7% while the two-year Treasury or the instrument most sensitive to monetary policy increased in yield to almost 5% with the market now suggesting the first-rate cut may now be in December.
Inflation is not declining and, in some regards, has doubled from the prior quarter’s pace. The 1Q pickup was driven by a 5.1% jump in service sector inflation that excludes housing and energy, the inflation statistic that has doubled from last quarter.
Regarding growth, however, the data is perhaps misleading. Final sales to private domestic purchasers, which strip inventories, trade and government spending, rose at a 3.1% rate versus last quarter’s pace of 3.3% , exceeding expectations. For three straight quarters, this gauge of underlying demand has expanded at least 3%.
As inferred, the “miss” in growth was a function of lower inventory accumulation and a wider trade gap. Government spending, which continues to boost the economy contributed 0.21 percentage point to the 1.6% growth rate, which is the least since the second quarter of 2022.
The drag from trade subtracted 0.86% for growth as there is a booming demand for imports. Yes Virgina, the US still the global engine for growth.
Regarding inventories, inventory accumulation was expected to add to GDP but instead subtracted 0.35% from GDP instead of adding almost 1% to growth as projected.
All in all, the data does not suggest the economy is falling into the abyss. The data also suggests that inflation is perhaps returning to the long-term average of around 3.3%.
Commenting further about equities, META weighed heavily upon the averages. Will META’s massive expenditures produce the desired results? The markets resoundingly said no. Some are perhaps suggesting yesterday’s selloff was a knee jerk over reaction. Unfortunately, only history may answer this question.
After the close both MSFT and GOOG posted results that exceeded expectations. GOOG shares are up about 11% while MSFT’s are up 4%.
Last night the foreign markets were up. London was up 0.48%, Paris up 0.32% and Frankfurt up 0.79%. China was up 1.17%, Japan up 0.81% and Hang Seng up 2.12%. Dow and NASDAQ futures are flat and up 1.0%. The 10-year is up 4/32 to yield 4.69%.
