What the Fed Said, and What 1Q GDP Means
Yesterday the Fed pretty much delivered what markets were expecting—no change to policy and no overt indications of any imminent changes ahead. In fact, the changes to the April statement consisted of only two minor tweaks to the March statement; all else was identical.
But there’s always a certain amount of tea-leaf reading involved with the Fed, and there’s more than meets the eye at the bottom of the Fed’s tea cup.
Risks to Growth
To start with, in its growth and inflation outlook the Fed eliminated the observation that “…Global economic and financial developments continue to pose risks.” Keep in mind that world financial markets have stabilized significantly since the March 16 FOMC meeting and it makes sense for the Fed to acknowledge that.
However, it would be short-sighted to conclude that the Fed is no longer concerned with what’s happening internationally. In fact, the Fed runs the risk of suggesting it’s more exclusively focused on domestic US conditions, potentially sending a disconcerting message to global investors.
More important were the Fed’s downgrades to overall economic growth (“slowed”) and household spending (“moderated”), the latter of which is the linchpin of the current US expansion. This suggests to me that the Fed is now clearly more concerned about future growth and that’s why they’re content to watch and wait.
As I’ve noted previously, in the past a steady Fed was good for market sentiment, as long as underlying growth prospects remained positive. That calculus may have shifted to one where the Fed holds steady, but now out of an abundance of caution given stuttering growth signals.
Looking out, I find it hard to see a rising sun anywhere on the global economic horizon, leaving the US as the main engine of global momentum. A prolonged period of sluggishness by the US raises the risk of a more ominous drag on the broader world economy, which is already struggling to keep its head above water anyway.
1Q GDP Is Not What it Seems, Unless It Is
Today, we just received confirmation of what we already knew was a weak 1Q in the US. Economists had spent the last several weeks revising 1Q US GDP forecasts lower, and the advance reading still came in below expectations: +0.5% vs. expected +0.7% and prior 1.4%.
Personal consumption was the one bright spot, if you can call it that, posting +1.9% vs. exp. +1.7%, but still down from +2.4% in 4Q, marking the third successive quarterly decline in the rate of personal consumption growth. And all of this against a backdrop of increasing job gains, just in case anyone was looking for what non-existent wage gains look like (see chart below).
Source: Bloomberg; DriveWealth
Still, this is the advance 1Q GDP report—water under the bridge to some--and it’s widely expected to be revised higher in the months ahead. As well, over the last decade there has been a pattern of 1Q GDP statistical underperformance that economists have been seeking to explain.
The point being, many observers will dismiss today’s GDP report as nothing to worry about. I would note, however, that US GDP has been slowing for the past three quarters now since the 2Q rebound following the 1Q 2015 slump. 2014 saw a similar pattern: 1Q slump, 2Q rebound, declines then through 1Q 2015.
I usually suggest not to attach too much importance to any single economic indicator, and quarterly GDP data reports are probably among my least favorite. Yet, given the sluggish global environment we’re facing, I can’t ignore when the world’s largest economy with the brightest forecasts (relatively speaking) comes up significantly short.
We have very little US data so far for 2Q/April, but what we do have is not especially encouraging: Apr. prelim-Michigan sentiment 89.7 vs. exp. 92.0 and prior 91.0; Apr. NAHB housing index-steady MoM; Apr. Phila. Fed -1.6 vs. exp. +9.0 and prior +12.4; prelim-Apr. Markit Manuf. PMI 50.8 vs. exp. 52.0 and prior 51.5; and Apr. Consumer Confidence 94.2 vs. exp. 95.8 and prior 96.1.
Final March data also came in mostly on the soft side. Taken together, there does not appear to be any obvious pick-up in the hand-off to the 2Q. As the Fed likes to say, the outlook remains highly data dependent.
Source: Bloomberg; DriveWealth
Near-term Market Outlook
In terms of market direction, the rally in risk assets remains intact, with commodities having posted a very strong April to date. Stocks continue to hover near to their highs, while momentum continues to wane against the backdrop of bearish divergences (MACD & Stochastics-- see chart above).
I don’t see much on the horizon to precipitate a cataclysmic decline, apart from a profit-taking correction that spins out of control if data continues to show weakness. At the same time, I also don’t see much in the way of a catalyst to further extensive gains, unless incoming data truly surprises to the upside.
As such, I’d stay very protective of long-risk positioning established back in Jan/Feb and be more inclined to take money off the table, especially on a daily close below the Kijun line (yellow line above) at 2066 in SPX.
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