U.S. financial markets have apparently decided that the disappointing first quarter GDP data released this morning are just another example of first quarter weakness. It’s the third straight first quarter GDP read that has shown a U.S. economy headed toward stagnation–and in each case the economy recovered to show better growth in the rest of the year. In 2015, for example, first quarter GDP grew at a 0.6% rate in the first quarter before recovering to post a 3.9% annualized rate of growth in the second quarter. In 2014 the first quarter saw a 0.9% drop in GDP ahead of a 4.6% gain in the second quarter.
With that as backdrop, the Dow Jones Industrial Average was off just 0.11% as of noon New York time; the Standard & Poor’s 500 stock index and the Nasdaq Composite index both picked up a bit of ground, climbing 0.16% and 0.50%, respectively.
Economists surveyed by Bloomberg had expected growth of 0.1% to 1.5% with a median forecast of 0.7%. In the fourth quarter of 2015 the U.S. economy grew at an annualized rate of 1.4%.
The weakness came across the board. Consumer spending, 70% of the U.S. economy, climbed by just 1.9%, down from 2.4% growth in the fourth quarter. That was the slowest growth in consumer spending since early 2015. Driven by a continued collapse in energy industry capital spending and weak demand from overseas, business investment showed the largest slump in almost seven years, dropping at a 5.9% annualized rate.
One reason that economists–and the markets–are willing to overlook this quarter is that conditions remain favorable for growth in the remainder of 2016. Gasoline prices remain low, new claims for unemployment dropped last week to near a four-decade low, disposable income adjusted for inflation rose 2.9% in the first quarter, up from 2.3% in the fourth quarter of 2015. Consumers put a big chunk of that gain in income into savings with the saving rate moving up to 5.2% from 5% in the fourth quarter.
Stripping out the effect of shifts in inventory and trade, a measure called final sales to domestic purchasers, climbed by a 1.2% rate. That was better than the GDP growth rate (because companies continue to cut inventories) but still below the growth in final sales last year. In fact this was the weakest final sales number since the third quarter of 2012.
Federal Reserve says just enough today to keep June interest rate increase on the table; watch tomorrow’s GDP numbers
No surprise that the U.S. stock market didn’t move much in response to today’s (April 27) Open Market Committee meeting. The Fed left interest rates alone and then released a statement that contained the minimum possible tweak needed to keep a potential increase at the June 14-15 meeting on the table. The Dow Jones Industrial Average closed ump 0.28%; the Standard & Poor’s 500 stock index gained 0.16%, and the NASDAQ Composite fell 0.51% under the influence of disappointing earnings after the close on Tuesday from Apple (AAPL) and Twitter (TWTR).
Here’s the Fed’s big change in language. In March the Fed said that “global economic and financial developments continue to pose risks.” Today the U.S. central bank said instead it will “closely monitor” such developments.
The Fed continued to feel positive about the job market even as it recognized that economy activity is likely to have slowed in the first quarter. A big question facing the Fed is whether any first quarter slowdown is simply a continuation of a recent pattern of weak first quarter results (followed by a pickup in growth) or a sign that the economy is actually headed for a slower year in 2016. The Bureau for Economic Analysis will release the initial read on first quarter GDP growth tomorrow, April 28. The Fed had already seen this data when it wrote today’s statement. The Atlanta Fed’s model of economic growth projects first quarter GDP will increase by just 0.6% year over year. (Growth in the fourth quarter was just 1.4%.)
Look to see if, over the next week or so, Fed members give speeches amplifying the Fed’s rather minimal change in language. Today’s meeting didn’t include a scheduled press conference by Fed chief Janet Yellen and I expect coming statements from Fed governors to pick up the communications slack. Not only what these speeches say but who delivers them is important. If doves,who have been reluctant to raise interest rates talk about the need for the Fed to move, as has been the case in one or two speeches lately, then the odds of a Fed interest rate increase go up faster than if it was just the same old interest rate hawks pushing for a move.
Also look to tomorrow’s GDP numbers to see if the first quarter upsets the Goldilocks story that the financial markets have been reading lately. That story has included just enough economic growth to keep stocks moving higher but not enough growth to prompt the Fed to move quickly on another interest rate increase for 2016.
I would expect the Fed futures market to start pricing in a higher chance of an interest rate increase in any case as we get closer to the June 14-15 meeting. But if that increase in odds is gradual, I don’t think it would be enough to change the market’s belief that conditions are “Just right.”
On my paid site: Playing the rally in natural gas, and looks ahead at the Fed meeting this week and possible tech earnings disappointments
On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy called tactical stock picking.
Today I’ve been looking at last week’s 13% rally in natural gas and picking through the shares of producers and pipelines to see which offer the best upside and when. A lot depends on the weather, I conclude, since the rally seems to be pricing in a hot summer.
And over the weekend I took a look ahead at the Fed’s meeting on Wednesday–an interest rate increase is unlikely I believe but the markets will be looking for any hints about what the Fed will do at its June meeting. And those hints will be enough to move the financial markets.
I also took a look ahead at technology earnings for this week. After easily surviving not as bad as expected bank stock earnings last week, the U.S. stock market showed that it’s vulnerable to disappointments in technology earnings as the NASDAQ index sold off on news from Alphabet, Netflix, and Microsoft. The big tech stories this week are Facebook, Amazon, and Apple (tomorrow, April 26.)
That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.
Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
Please don’t overlook today’s post on this free site on why I want to buy Nvidia soon and how I’m trying to get the timing right.
There is no sign of a budding revolt against Janet Yellen in the minutes of the Federal Reserve’s March 16 meeting released today. Nor is there evidence that the financial markets have mis-interpreted the locus of the Fed’s worries: concern over volatility in the global markets comes up over and over again in the minutes.
So if you want to read these minutes as assurance that the Fed will go very, very slowly on raising interest rates–so slowly that the U.S. central bank might raise rates just once (or less) in 2016–then you can. And that’s what the markets have done today with the euro up against the dollar (by 0.14%), oil up (West Texas Intermediate closed up 5.27%) on the weaker dollar, and the Standard & Poor’s 500 ahead (by 1.05% at the close.)
But the minutes also raise the stakes for the Federal Reserve’s June 15 meeting. One reason that Fed members are inclined not to raise interest rates at the Fed’s April 27 meeting, the minutes show, is that a hike at a meeting without an already scheduled press conference by Fed chair Yellen, and the April meeting doesn’t have a scheduled press conference, is that it would make it seem that the Fed was more worried than it is. Markets might indeed decide that an April increase signaled an emergency. And that’s the last signal that the Fed wants to send.
Which puts all eyes on the June meeting with its regularly scheduled post-meeting press conference. As we get closer to that date, I’m sure speculation will run wild on the Fed’s intentions. If the central bank wants to raise interest rates twice in 2016, as it signaled at its March 16 meeting and if it wants to raise rates very slowly, the Fed just about needs to act on a first interest rate increase at the June meeting in order to spread out the increases. Taking a pass in June will certainly encourage all those traders who are looking for just one interest rate increase in 2016 in their belief.
In other words, if the minutes released today are reassuring, that reassurance comes with a June expiration date.
Today, the Fed funds futures market is giving odds of an April interest rate increase at just 3%. June odds are only 18%. September comes in at 40% and November at 44%.
If I can revive a hoary cliche, today’s employment news was a “Goldilocks” report on jobs.
Just enough job growth in March–215,000 net new jobs added for the month–to keep the Federal Reserve on track for an eventual increase in interest rates. Economists had been looking for an increase of 205,000.
And just enough weakness in the report–the number of Americans working part-time but looking for full-time work rose by 135,000 to 6.12 million, the highest since August–to let the market believe that any interest rate increase will be modest and is a long way off. The Fed Funds futures market gives just 50% odds on a November interest rate increase today.
Wage growth, which had fallen 0.1% in February, picked up to show a 0.3% increase in average hourly wages in March. That brings the year over year increase in wages to 2.3%. That’s certainly high enough to give the market confidence that consumers, the drivers of economic growth right now with business investment lagging, will continue to spend. Economists surveyed by Bloomberg had been looking for a 0.1% increase in wages.
In a Monday speech Fed chair Janet Yellen had argued that there was more slack in the labor market than the top line unemployment rate indicated and that was one reason that the Fed should go very slowly on increasing interest rates. Today’s report with its rise in the number of part-time jobs and a tick upwards in the unemployment rate to 5% as more workers decided to reenter the workforce certainly support Yellen’s caution.The full unemployment rate, which counts discouraged workers who have stopped looking for jobs and workers who want full-time jobs but have only been able to find part-time work, moved up to 9.8% from 9.7% in February. The labor participation rate rose to 63%, the highest once March 2014.
Oil fell on the jobs news–and on a report that Saudi Arabia would only agree to freeze production if Iran also agreed. (I can’t say “never” on the possibility, but let’s say it’s “extremely unlikely” that Iran will agree to freeze production.) At 2 p.m. New York U.S. benchmark West Texas Intermediate was down 3.36% to $37.05 a barrel and the Brent benchmark was lower by 3.72% to $38.83 a barrel.
Emerging markets and emerging market currencies, which have taken their direction from oil prices recently, fell along with oil. The iShares MSCI Emerging Markets ETF (EEM) was off 0.41% as of 2 p.m.
The Dow Jones Industrial Average was ahead 0.34% and the Standard & Poor’s 500 stock index was up -0.21%.