bonds and equities move higher post GDP data ?

Friday saw the release of the first estimate for GDP growth in the US economy for the first quarter of 2019. The result beat expectations by something of a margin as the US economy is estimated to have grown at an annualised rate of 3.2%, in the first three months of the year. Much of the data from the US economy has disappointed in the first quarter, sometimes to some surprise, not this one. Markets have rallied this year, US large cap equities by 16% in the first quarter, despite a mixed bag of data, boosted by the Fed’s dovish stance. Bad economic news has been good news for share prices, once again. The question that may be posed to investors is what the Fed’s reaction will be to this GDP report? Will they be tempted to become slightly more hawkish? Moreover, if they do how capital markets will react? We may get something of an answer this week as the Federal Reserve meet to announce their latest interest rate decision.

Surprisingly yields on US Treasuries fell on Friday, and this would suggest that capital markets may expect the first GDP estimate to be lowered in the coming weeks. In turn, the Fed will remain on course to keep rates unchanged for the year ahead. Digging into the report, Bloomberg pointed to areas of remaining weakness in the consumer and the inflation data, this may help the Fed maintain its dovish stance. The Vix index fell again on Friday also suggesting the stronger than expected data will not throw the Fed from their current course. All this pushed the CNN fear and greed index further into greed territory at the end of the week.

Despite disappointing numbers from companies such as MMM, earnings season overall for US companies appears to be meeting or beating expectations. Forecasts were for a first-quarter decline of 2.5%. According to a Swiss Credit report that estimate is moving into positive territory. Some significant names are reporting in the week ahead including Apple, Alphabet, GE and MacDonald’s. The dial could be moved once again.

We speculated during the week that equity markets might need something new after such a strong start to the year to keep the momentum going. One feels it is hard to think where that is coming . Other data points for the week ahead will be the Bank of England rate announcement; nothing is likely to change until Brexit is resolved.

Further data points for the underlying strength of the US economy in the coming week will be the latest jobs report as well as wage growth. The latest ISM manufacturing PMI data is expected to show a slowdown in US manufacturing. Along with the Bank of England’s rate decision, we will get the latest inflation report and its monetary indicators.

Posted on April 28, 2019 .