The economy contracted at the start of the yar for the first time since 2022 on monumental pre-tariffs import surge. Initial estimates of first quarter GDP decreased at an annualized 0.3% rate in the first quarter, well below average growth of about 3% in the prior two years. Net exports subtracted a record 5% from the GDP.
Typically, imported merchandise moves into warehouses or directly to storefronts. However, the report showed business inventories contributed 2.25% to GDP during the quarter, the most since the end of 2021.
The recent flood of imports may instead show up in higher inventories in coming months and along with a narrowing trade gap, may provide a little lift to second quarter GDP.
Because swings in trade and inventories can sometimes distort overall GDP, perhaps final sales to private domestic purchasers are a better indicator. This measure—ex inventories and imports—increased at a 3% pace in the first quarter after rising an annualized 2.9% at the end of the year.
The inflation indicators of the GDP, however, the core PCE accelerated to a 3.5% pace in the first quarter, the most in a year according to government data.
All markets sold off considerably on the data until the monthly PCE statistics were released [the Federal Reserve’s preferred measure of inflation]. This data offered some relief as a measure of goods that exclude food and energy fell for the first time this year and the category that also excludes housing and energy was little changed and the tamest since 2020.
Equity markets retraced about 65% of their losses, the front end of the yield curve rallied and about 50% of the losses in the long end of the Treasury market were recouped on the monthly PCE statistics.
Generally speaking, the data added to the overall uncertainty.
The prevailing narrative is that the economy is on the verge of an inflationary recession, a view that is loudly echoing in the unbridled social media venues.
Most fear more of the unknown than known, typically adopting a negative outlook. The global trading environment was changing before Trump’s re- election, a change that commenced in 2008, accelerated in 2012 and went on steroids in 2020/21. Despite the controversy over the President’s proposed tariff programs, an argument can be made is that the President is only responding to the current environment.
As stated many times, no one knows the outcome. The uncertainty is huge. However, perhaps a bigger issue that has yet been addressed is the deficit. There is a growing list of market luminaries that ardently believe a fiscal crisis is inevitable given Washington’s inability to control spending, an environment amplified by the rising cost of money.
Changing topics, approximately 22% of the S & P 500 capitalization [four companies] will post earnings in the next 12 hours.
After the close both MSFT and META released earnings that exceeded expectations, sending shares 9.3% and 6.2% higher, respectively in early morning trading . Tonight, AMZN and AAPL are released and tomorrow is the all-inclusive BLS labor report.
Last night the foreign markets were mostly closed for the May 1 holiday.
Dow and NASDAQ futures are up 0.8% and 1.8% on the MSFT and META earning beat. The 10-year is up 6/32 to yield 4.14%.
