Market Mornings Weekly Recap & Outlook (2024.04.29) The Apple Effect: Analyzing Corporate Earnings in a Global Context

A substantial amount of data was available for market digestion in the past week, particularly on the economic front. This included an advanced assessment of Q1 GDP and persistent inflation figures. Despite the advanced Q1 GDP report indicating a slowdown in quarterly output (1.6% in Q1 compared to 3.4% in Q4 and 4.9% in Q3), the decline was primarily driven by exports and trade data. However, the Atlanta Federal Reserve’s GDPNow estimate for Q2 GDP, released recently, stands at a healthy 3.9%.

Highlighted below are some key points from the week:

• The S&P Global US Manufacturing PMI declined to 49.9 from 51.9 in March, marking a four-month low. Similarly, the S&P Global US Services PMI decreased to 50.9 from 51.7 in March, representing a five-month low.
• Initial Jobless Claims saw a 5K drop from the previous week to a seasonally adjusted 207K, below the 215K economists had anticipated, indicating a tight labor market.
• Q1 GDP: The advanced reading came in at 1.6%, well below the expected +2.5%, primarily due to weakness in trade and exports data. Personal Income (current dollar and disposable) both increased, while personal savings declined. Of greater significance to the markets, the Q1 “core” Personal Consumption Index, excluding food and energy components, rose to +3.7%, significantly higher than the 2.0% gain in the previous quarter and above the +3.4% economists had forecasted.
• The Atlanta Fed GDPNow current expectation (nowcast) for Q2 GDP was reported at 3.9% (quarter-over-quarter, annualized).
• Personal Consumption Expenditures (PCE) Prices: Both headline and core figures came in at +0.3%, aligning with expectations. On a 12-month basis, headline PCE increased to 2.7% from the previous month’s year-over-year reading, while core PCE remained unchanged at 2.8%.
• Bond yields saw a gradual increase during the week, driven by inflation data that exceeded expectations. Yields on two-year Treasuries reached a five-month high of 5.025% yesterday but have since eased to the current level of 4.991% (note: 5.20% is the cycle high for the two-year). Yields on the 10-year (TNX) also hit a fresh five-month high of 4.737% but are currently at 4.663%, possibly aided by in-line PCE data. The bond market continues to anticipate higher rates for longer periods, driven by persistent inflation data, with equity investors showing resilience as long as economic data remains strong.
• Market expectations regarding potential Fed rate cuts have gradually diminished throughout the year. The Bloomberg probability of a June rate cut decreased from 18% last Friday to 12% this week, and the probability for July stands at 36%, down from 48% last Friday. Based on the 65% threshold (representing the approximate line in the sand for a Fed action, either a hike or a cut, over the past nine years or so), September appears to be the first meeting where a Fed cut is anticipated.

The week ahead promises to be highly eventful for the US dollar, featuring significant events such as an FOMC meeting and the release of the April jobs report, among other key data releases. Investors will find little respite with the flurry of data on the US agenda.

The focal point of attention in the first half of the week will be the Federal Reserve’s policy decision on Wednesday. Previously, there was speculation that the May meeting would solidify the path to a rate cut in June. However, recent data showing higher-than-expected inflation and employment figures have pushed expectations for a rate cut further into the future, with September now seen as a more likely timeframe.

With no updated FOMC projections accompanying the May decision, investors will closely watch Chair Powell’s press briefing for any hints on the timing of potential policy easing. Despite some investors hoping for a summer rate cut, recent commentary from Fed officials suggests a willingness to stay on pause for a while longer, although the majority still anticipate some easing later in the year. Powell is expected to emphasize patience while hinting at the possibility of future rate cuts.

Investors will scrutinize Powell’s confidence in inflation decreasing substantially in the coming months, which would allow for policy loosening. A somewhat more hawkish tone from Powell could reignite the US dollar’s upward trend.

In the absence of fresh signals from the Fed, attention will turn to Friday’s nonfarm payrolls report, where analysts anticipate job additions of around 210k in April, with the unemployment rate forecasted to remain at 3.8%. Wage increases will be closely monitored, as any acceleration in average hourly earnings could trigger concerns about diminishing rate cut expectations.