Market reaction to today's US GDP report was positive.
Initially, the market was spooked because the higher inflation numbers in the report implied an upside surprise in the US personal consumption expenditures data released on Friday. But as the day went on, that faded and stocks regained much of the gains, except for some tech-inspired selling.
With Fed cuts scheduled until at least July 31, I don't think inflation in March or April matters much. What will start to matter more and more is what happens with pricing later in the year and that's where the growth comes in. Today's Q1 GDP data was weak at 1.6% versus 2.4% expected. Some of these are just one-time quirks like inventories, but the path to lower growth is becoming increasingly clear.
It is also clear to me that inflation will follow, although the timing is difficult to pinpoint. Employment is not a leading indicator, but Ian Shepherdson of Pantheon makes a compelling case that it is softer beneath the surface than it appears.
“I have been concerned for a while that the weak NFIB survey of small businesses indicates much slower job gains from the second quarter onward.” He writes. “Now, the S&P PMI Employment Index tells the same story; it's a more synchronized indicator, while the NFIB is about 4 months ahead. See below.”
Tomorrow the focus will undoubtedly remain on inflation with PCE data but don't forget we saw a big move earlier this week on the weak US Services PMI from S&P Global.
