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.

Outlines

00:00

📉 Slower GDP Growth and Market Reactions

The US economy grew at a slower pace in the first quarter than initially reported, with GDP rising 1.3% annualized, reflecting softer consumer spending. This has led to higher treasury prices and falling yields. Sam Stoval, CFRA's Chief Investment Strategist, explains that while this data is important, the upcoming PCE report is expected to have a greater impact. Downward revisions in areas such as the price index for gross domestic purchases and personal income highlight consumer influence on the economy. Stoval suggests that while there's some concern about potential rate hikes, the focus remains on the Fed and inflation. The Fed might start cutting rates in September, benefiting stocks and sectors like financials and real estate.

05:01

📊 Divergence in Market Performance

There is a noticeable divergence between Nvidia's strong performance and the broader market, raising concerns for analysts like Sam Stoval. Despite Nvidia's outperformance driven by expectations of substantial earnings growth in semiconductors and AI-related industries, the overall market remains negative. Technology was the best-performing sector, while most others, including defensive areas, were in the red. Stoval warns that without broader market participation, the market could retest previous lows. This divergence underscores the need for cautious optimism in the face of varying sector performances.

Keywords

💡GDP

Gross Domestic Product (GDP) measures the total value of goods and services produced within a country. In the video, GDP growth for the first quarter was reported at 1.3%, indicating slower economic growth than initially estimated. This figure is crucial for understanding the overall economic health and is a key factor in financial markets and policymaking.

💡Consumer Spending

Consumer spending refers to the total expenditure by households on goods and services. The video highlights that softer than expected consumer spending contributed to the slower GDP growth. Since consumer spending makes up a significant portion of the economy, its fluctuation directly impacts economic performance.

💡Federal Reserve (Fed)

The Federal Reserve (Fed) is the central banking system of the United States, responsible for setting monetary policy. In the video, discussions about potential rate cuts and hikes by the Fed are pivotal, as these decisions influence interest rates, inflation, and overall economic activity.

💡PCE Report

The Personal Consumption Expenditures (PCE) report measures price changes in consumer goods and services. It is an important indicator for assessing inflation. The video mentions that the PCE report, due the next day, is more significant for economic analysis than the GDP report, highlighting its role in shaping Fed policy.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. The video discusses inflation in the context of Fed decisions, with rising prices influencing the likelihood of rate hikes or cuts. Controlling inflation is a primary goal of the Fed's monetary policy.

💡Earnings

Earnings refer to the profit that a company makes during a specific period. The video mentions that the focus is now on earnings and inflation (EI), particularly with Q1 earnings completed and forecasts for Q2 being anticipated. Earnings are crucial for assessing company performance and stock market trends.

💡Bond Market

The bond market is where investors buy and sell debt securities, primarily in the form of bonds. The video notes that Treasury prices were rising, and yields were falling in response to the latest GDP data, indicating a shift in investor sentiment towards safer assets amid economic uncertainty.

💡Rate Cut

A rate cut involves the Fed lowering interest rates to stimulate economic activity by making borrowing cheaper. The video discusses the possibility of the Fed cutting rates, with September being mentioned as a potential starting point. Rate cuts can boost spending and investment but also risk higher inflation.

💡Technology Sector

The technology sector includes companies that develop and sell technological products and services. The video highlights that despite overall market challenges, the technology sector, driven by AI advancements, has been performing well. Nvidia's earnings and its impact on the market are specifically mentioned.

💡AI (Artificial Intelligence)

AI refers to the simulation of human intelligence in machines. The video emphasizes that AI is driving growth in the tech sector, particularly for companies like Nvidia. AI's influence is reshaping industries, contributing to market dynamics, and is a key area of investor interest.

Highlights

US economy grew at a slower pace in the first quarter than initially reported.

GDP rose 1.3% annualized in the first three months of the year, slightly below the previous estimate.

Treasury prices pushed higher and yields fell following the GDP report.

Sam Stovall, CFRA's Chief Investment Strategist, discusses the market reaction to the latest GDP data.

Q1 GDP growth was slower than estimated, but Atlanta Fed forecasts over 3% growth in Q2.

Tomorrow's PCE report is considered more important than the GDP report for market implications.

Downward revisions across growth areas are important, especially those related to consumer spending.

Consumer spending represents about 70% of the overall economy and is influential for inflationary readings.

Data is subject to revision, with a third revision expected before the quarter ends.

Regular consumer confidence and employment data are key indicators for the economy.

Investment strategy currently driven by earnings, inflation, and the Federal Reserve's actions.

Cutting rates by the Fed in September is expected, though there's less confidence in the timing.

A potential rate hike is a possibility but not a likelihood, according to Fed Chair Powell.

When the Fed cuts interest rates, it tends to benefit large and small cap stocks, as well as interest-sensitive areas.

Technology and communication services have been the best performing sectors since Dow hit 40,000.

Semiconductors, expected to post significant earnings growth, have been the top-performing sub-industry.

A divergence between Nvidia's stock performance and the broader market may be a cause for concern.

Transcripts

well features are in the red with

investors digesting the fresh econ data

out this morning the US economy growing

at a slower Pace in the first quarter

than initially reported reflecting

softer than expected consumer spending

GDP rising 1.3% annualized in the first

3 months of the year that is below

slightly below the previous estimate now

for more on this we want to bring in Sam

stoval he is cf's research Chief

investment strategist is here and say

when you take a look at the market

reaction right now not so much in the

equity markets but really what we're

seeing in the bond markets here this

morning because we have treasury prices

here pushing higher yields falling on

the heels of this reading so I'm curious

how you're looking at this latest data

print and exactly what this means in

terms of how this factors into the fed's

timeline for a potential rate cut well

good morning Shauna uh I think it's just

one of several factors and probably

least important one compared with

tomorrow's pce report uh but certainly

it was a bit of a encouragement in that

q1 GDP growth came in uh slower than was

originally estimated uh of course

there's still the the forecast from uh

GDP now Atlanta fed uh looking for a

greater than 3% growth in the second

quarter uh so I think we'll have to wait

to see what uh transpires for the uh

entire quarter but I think tomorrow's

pce will be more important than this GDP

report Sam I'm focusing in on some of

the areas where there were downward

revisions here whether that be the price

index for gross domestic purchases uh or

that'd be the current dollar personal

income and then another one profits from

current production which of these is

kind of most significant or has an

outsized impact on where we did see GDP

come in versus the previous

estimates well I think downward

revisions uh to these growth areas uh

are important across all three certainly

whatever has to do with the consumer is

the the most important in my opinion

since the consumer represents about 30

uh 70% of the overall economy and also

is very influential when it comes to

inflationary readings uh but we also

know that these uh data are uh subject

to revision there will be a third

revision before all is said and done uh

so I would look uh more toward regular

consumer confidence as well as the

employment data when it comes out uh a

week from Friday so Sam how does all

this factor into your investment

strategy when we're talking about really

what is going to be driving the equity

markets in the near term is it now all

about the FED because of where we are

within the uh earning

cycle yes it is uh AI is driving Tech uh

and the semiconductors but EI earnings

and inflation are driving the market and

now as you just said with q1 earnings

essentially completed and we're waiting

uh for forecast for Q2 the focus is

entirely on the fed and inflationary

readings we think at the early the FED

will be cutting rates in September uh we

had been saying for a while that we

thought we'd get two cuts this year

September and December but I would tend

to say that we are becoming less

confident about the start in September

so certainly a concern that investors

have to deal with right now Sam what

about the notion of a potential raid

hike is that something that you think at

all is a possibility at this point uh

well possibility but certainly not a

likelihood it might be back on the table

but it's pretty far back on the table if

you will uh so I mean we have to

remember what Fed chair Powell said

highly unlikely uh about a rate hike but

certainly with the 10-year yield

climbing uh with commodity prices rising

uh with economic data remaining

resilient uh I I think it's at least the

risk is back on the table though remote

where where does risk also lead to any

rotation for investors who are trying to

figure out once we do see the Fed start

its cutting cycle how they should be

positioned well right now I mean we're

seeing rotation since the uh the Dow hit

40,000 on May 17th really there has been

no place to hide except Tech and

communication Services uh whereas if

it's not AI related it was in the red uh

but historically when the FED does start

to cut interest rates that tends to

benefit stocks uh tends to benefit large

and small cap stocks tends to benefit

the uh thei the interest sensitive areas

like financials and real estate as well

as the more growth oriented groups

pushing the defensives like Consumer

Staples Health Care uh off to the

sidelines so uh I would tend to say that

depending on when the FED does start to

cut interest rates then I think we could

be seeing uh risk on once again so when

you take a look at the action that's

played out since nvidia's earnings print

just last week we've seen an

outperformance in nvidia's stock yet

when you take a look at the broader

Market when you take a look at the S&P

we haven't necessarily seen that

Euphoria follow suit what does this

signal to you and is this kind of

Divergence that we're starting to see

between Nvidia and the performance of

the rest of the market is that worrisome

at all to you yes I think it is uh

because when you look to as I had

mentioned before since the uh recent

High uh at least for the Dow above

40,000 uh the best performing group was

technology up

4.3% uh on the S&P 500 while the market

itself was negative and all other

sectors except communication Services

were in the red even the defensive areas

and when you look to the best performing

sub Industries not surprisingly

semiconductors was up 14% well good

reason that um expectations are that

this group will post a 45% increase in

earnings this year 35% gain next year

but also those AI Tagalongs like heavy

equipment heavy electrical equipment

that are uh meant to power uh the AI

areas also the independent power

producers uh all of which were up by 7%

or more so I I would tend to say that if

we don't get a broadening of

participation once again uh then that we

could be uh retesting the low that we

saw on April 19th Sam stoval cfra

research Chief investment strategist

thanks so much for breaking this down

with us and uh giving your perspective

here ahead of today's opening belt Sam

appreciate it my pleasure thanks