What the latest economic indicators mean for Fed rate cuts

Summary

Investors are reacting to new economic data showing the US economy grew slower than expected in Q1, with a 1.3% annualized increase. Sam Stovall, CFRA's Chief Investment Strategist, discusses the implications for the Federal Reserve's rate cut timeline, emphasizing the importance of tomorrow's PCE report. He notes that while Q1 GDP was revised downward, consumer spending and employment data are key. Stovall suggests that the Fed is unlikely to raise rates soon, but the possibility is not entirely off the table. He also highlights a potential rotation in investment strategy towards tech and communication services, as AI and earnings drive the market.

Takeaways

• 📉 The US economy grew at a slower pace in the first quarter than initially reported, with GDP rising at a 1.3% annualized rate.
• 📈 Treasury prices increased and yields fell in response to the GDP data, indicating a market reaction in the bond markets rather than equity markets.
• 👤 Sam Stovall, CFRA's Chief Investment Strategist, suggests that the Q1 GDP report is less significant compared to the upcoming PCE report.
• ⏱️ The Atlanta Fed's GDPNow forecast still anticipates a greater than 3% growth for the second quarter.
• 🔍 Downward revisions in the GDP report include the price index for gross domestic purchases, current dollar personal income, and profits from current production.
• 🛍️ Stovall emphasizes the importance of consumer spending, which represents about 70% of the overall economy and is influential in inflationary readings.
• 🔄 The data is subject to revision, with a third revision expected, so Stovall advises to focus on regular consumer confidence and employment data.
• 💹 The focus for equity markets is on the Federal Reserve (Fed) and inflationary readings, with earnings and inflation driving the market currently.
• 📉 Stovall's team predicts that the Fed will cut rates in September, though there is less confidence in the timing, reflecting concerns for investors.
• 📈 The possibility of a rate hike is remote, according to Fed Chair Powell, but the risk is back on the table due to rising commodity prices and resilient economic data.
• 🔄 When the Fed starts cutting interest rates, it historically benefits large and small cap stocks, interest-sensitive areas like financials and real estate, and growth-oriented groups.

Q & A

What is the latest GDP growth rate reported for the US economy in the first quarter?

The latest GDP growth rate reported for the US economy in the first quarter is 1.3% annualized, which is slightly below the previous estimate.

How did the market react to the revised GDP growth rate?

The market reaction was more noticeable in the bond markets rather than the equity markets, with treasury prices pushing higher and yields falling following the GDP report.

What is the significance of the PCE report mentioned by Sam Stovall?

The PCE report is significant as it is considered more important than the GDP report in terms of its impact on the Fed's decision-making regarding interest rates.

What is the current forecast for GDP growth in the second quarter according to the Atlanta Fed?

The current forecast from the Atlanta Fed is looking for a greater than 3% growth in the second quarter.

Which areas saw downward revisions in the GDP report?

Downward revisions were seen in the price index for gross domestic purchases, current dollar personal income, and profits from current production.

Why is the consumer sector particularly important in the context of the GDP report?

The consumer sector is important because it represents about 70% of the overall economy and is very influential when it comes to inflationary readings.

How does Sam Stovall view the potential for a rate hike by the Fed?

Sam Stovall views a rate hike as a possibility but not a likelihood, stating that it might be back on the table but pretty far back, given the current economic conditions and Fed Chair Powell's statement of it being 'highly unlikely'.

What is the current investment strategy focus according to Sam Stovall?

The current investment strategy focus is on earnings and inflation, with the entire focus being on the Fed and inflationary readings, especially as Q1 earnings are essentially completed.

What sectors are expected to benefit when the Fed starts cutting interest rates?

When the Fed starts cutting interest rates, it tends to benefit large and small cap stocks, interest-sensitive areas like financials and real estate, as well as growth-oriented groups, pushing defensive sectors like Consumer Staples and Health Care to the sidelines.

What has been the market performance of Nvidia and the broader market since Nvidia's earnings report?

Since Nvidia's earnings report, there has been an outperformance in Nvidia's stock. However, the broader market, as represented by the S&P, has not followed suit with the same level of euphoria.

What does Sam Stovall suggest about the potential for a broadening of market participation?

Sam Stovall suggests that if there isn't a broadening of market participation, the market could be retesting the low that was seen on April 19th.