Looking back and looking forward

Stocks traded higher yesterday after banks got a clean bill of health from the Feds. Technology shares lagged FOR A CHANGE as broader markets and bond yields went up.

Is it good or is it bad? Who even knows anymore? Earlier this week Chairman Powell was anything but demure on the international stage as he jawboned with a capital “J”. Jawboning is the term used to describe how powerful figures use their power of speech to signal markets and even affect changes in them. If the most powerful banker IN THE WORLD, the Head Fed, Jay Powell says, outright, that rates are likely to be higher by another +50 basis points, one is probably smart to take his words seriously. Now, of course, that doesn’t mean that there is a 100% chance that his “predictions” will come true, but they are more likely than less… assuming that nothing changes. We all know that indeed, things do change.

While it is a severely lagging indicator, possibly the most watched economic figure is the Gross Domestic Product, or GDP. You can say that, in economics, “the buck stops with GDP, literally!” Wow, so early in the morning and I already hit you with a nerdy economist joke. The GDP measures the total output of an economy. When it is growing… um, that is good, and vice versa, when it is falling, which is typically an indicator of recession. Growing bigger = better and falling bigger = worse. Coming up with an accurate read on GDP is no small task. It takes time to gather all the numbers. That is why we are still revising the number for the first quarter of 2023. You know, THE ONE THAT ENDED ALMOST 3 MONTHS AGO. But, still, economists, stock traders, politicians, and yes, even my mother-in-law (who is surprisingly tapped into the state of all things) are interested to know what the health of the US economy is.

Even if you don’t have time to read my market note every day, you have surely gotten the message that many economists are expecting a recession later this year. Corporate revenue growth has been slowing and as such, they are spending less money. Presumable, consumers are spending less money due to the Fed’s aggressive rate hiking campaign. It, therefore, seems logical that the chances of recession are increasing. But the entry level requirements for a recession include a decline in GDP. So, is it… declining? HECK, no. Way back in April, the Bureau of Economic Analysis (BEA) released its first estimate of Q1 GDP which came in surprisingly lower than expected at +1.1%. That negative surprise certainly supported the coming recession case. Last month, the BEA took another shot at the figure and revised it up to +1.3%. Though the case for recession was somewhat weakened, the number was still anemic… so, recession was still on the table. Yesterday, the BEA released its final assessment of Q1 GDP. Economists were expecting it to come in at +1.4% but it actually came in at +2.0%! Now, to be fair, that is lower than Q4’s +2.7%, but it is clear that economists got this one wrong and that the number just kept getting revised upward. Indeed, things do change!

What does that mean for interest rates? Well, Powell all but promised them, and without a recession, there is really nothing to curb the Fed’s hiking predilection. So, is a strong economy good news or bad news? Let me know what you think. So, far the markets, barring technology which lagged yesterday, seem to think that it is good. Bond yields were higher in the session, as would be expected with a strong economic number. Wait, but there is one other thing that could cause the Fed to stop hiking interest rates. A decline in inflation. That’s right the whole reason for the hiking in the first place. I suppose that it is convenient that on this very morning we will get a read on inflation. In fact, this one is the Fed’s favorite indicator, the PCE Deflator. It is expected to show a monthly and annual deceleration. If indeed that does occur, or if it declines farther than expected, the Fed may be less likely to put actions behind its strong words. Things change and with it, the markets.

YESTERDAY’S MARKETS

Stocks traded higher but left the recently hot Nasdaq in the rearview mirror. Banks got a clean bill of health, and the economy grew at a better-than-expected clip in the first quarter. The S&P500 gained +4.5%, the Dow Jones Industrial Average rose by +0.80%, the Nasdaq Composite slipped by… a hair not wort printing, and the Russell 2000 Index jumped by +1.23%, aided by a strong showing in bank stocks. Bonds declined and 10-year Treasury Note yields gained +13 basis points to 3.83%. Cryptos gained +2.10% and Bitcoin climbed by +0.98%. The S&P ESG Index advanced by +0.34%.

NEXT UP

• Personal Income (May) is expected to have grown by +0.3%, slightly less than last month’s +0.4%.
• Personal Spending (May) may come in at +0.2%, slower than the prior print of +0.8%. The Fed watches this closely, as well.
• PCE Deflator (May) is expected to come in at +3.8%, lower than last month’s +4.4%.
• MNI Chicago Purchasing Managers Index (June) may have climbed to 43.8 from 40.4.
• Next week: The abbreviated week will be punctuated by the monthly job numbers, and it will include PMIs, Factory Orders, Durable Goods Orders, and JOLTS Job Openings. Check back next week for calendars and details.