The market reaction to today’s US GDP report has been instructive.
At first, the market panicked because the high inflation numbers presented in the report implied an upside surprise in Friday’s US PCE data. However, as the day progressed, this trend eased and stocks recouped much of the gains, excluding some tech-inspired META selling.
With the Fed rate cuts scheduled until at least July 31, I don’t think March or April inflation matters much. What will increasingly matter is what happens with prices later in the year and that’s where growth comes in. Today’s Q1 GDP data was weak at 1.6% versus 2.4% expected. This is partly due to one-offs, such as inventories, but the path to lower growth is increasingly clear.
It is also clear to me that inflation will follow, although the timing is difficult to determine. Employment isn’t a leading indicator, but Pantheon’s Ian Shepherdson makes a compelling argument that it’s softer beneath the surface than it appears.
“I have been concerned for a while that the weakening of the NFIB small business survey portends much slower job creation starting in the second quarter,” he wrote. “Now the S&P PMI employment index tells the same story; it’s more of a coincidental indicator, while the NFIB is about 4 months ahead. Watch below.”
Tomorrow the focus will undoubtedly remain on inflation with PCE data, but remember we saw an outsized move in S&P Global’s US services PMI weakness earlier this week.
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