First quarter real GDP rose by 1.1%, lower than the consensus view of 2.0%. The internals, however, presented an entirely different view. Final sales to domestic purchasers, which take out inventories and trade rose at a much stronger rate of 3.2% thus dispelling recessionary fears for now.
Consumer spending grew at a strong 3.7% annualized pace, up from 1.0% in the prior quarter, the strongest pace in two years according to the Commerce Department.
These prints will likely strengthen the Fed’s commitment to raise rates by another 25-bps next week. Many are expecting consumer spending to slow in the months ahead, but the data suggests it will remain positive for the full year.
Speaking of inventories, inventories took away 2.3% from GDP growth. Writing it differently, inventories must be replenished thus suggesting economic activity may accelerate. Inventory drawdown can be viewed either bullish or bearish. The bearish camp would suggest companies are not optimistic about tomorrow thus firms may not want to have significant capital in items that may not be sold.
And then there is inflation, the personal consumption expenditures price index grew at a 4.2% annualized pace. Ex food and energy, the index rose 4.9%, faster than forecast and the most in a year.
This data point does not bode well for today’s release of March’s PCE which is a primary inflationary determinate of Fed policy.
The data clearly suggests the “boomflation” environment is still at hand, defined as strong nominal GDP and inflation. Several Fed officials, including the Vice Chairman has recently stated that the economy is experiencing “boomflation” for the first time in about two generations.
Regarding profitability, the data implies negative labor productivity in the first quarter, compared to 1.7% in 4Q22. This suggests pressure on profit margins from labor compensation is likely to rise.
Equity markets led by the technologies ignored the inflationary data of the GDP report and staged the strongest rally since January, predicated by strong earnings from META.
Treasuries on the other hand focused on the pricing data and sold off with yields increasing across the curve.
After the close AMZN posted results which exceeded expectations. Shares surged about 10% in after-hours trading but after further analysis of the results, shares are now down about 2.5% from yesterday’s close as it was interpreted that their cloud business is slowing.
Last night the foreign markets were mixed. London was down 0.27%, Paris down 0.91% and Frankfurt down 0.47%. China was up 1.14%, Japan up 1.40% and Hang Seng up 0.27%.
Dow and NASDAQ futures are down 0.25% and 0.50% respectively but this could change given the 8:30 report on March’s PCE data. As widely known the PCE is the primary inflationary determinate of the Federal Reserve. The 10-year is up 3/32 to yield 3.48%.
