Latest / Markets with Megan: A Quick Financial Markets Update / Inflation and Interest Rates in Focus After GDP Report | Episode 126 | 04-25-2024

Transcript

Inflation and Interest Rates in Focus After GDP Report | Episode 126 | 04-25-2024 · Markets with Megan: A Quick Financial Markets Update

• 0:02
  Megan Horneman: It's being called the worst of both worlds.
• 0:04
  Megan Horneman: I'm Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan, and we're speaking of the first quarter GDP report that we got this morning, on Thursday April 25th.
• 0:17
  Megan Horneman: Let's dig into these details.
• 0:19
  Megan Horneman: It was a very disappointing report on both ends and this is why we're seeing stock markets sell off today and bond yields rise.
• 0:27
  Megan Horneman: So let's dig right in.
• 0:28
  Megan Horneman: First of all, the number came in weaker than expected.
• 0:32
  Megan Horneman: So the expectation was for two and a half percent growth in the first quarter.
• 0:36
  Megan Horneman: We got one point six percent.
• 0:38
  Megan Horneman: But that's not really what sent the shockwaves through the market.
• 0:41
  Megan Horneman: The big, the big number in this was the core PCE.
• 0:45
  Megan Horneman: This is inflation.
• 0:46
  Megan Horneman: In the first quarter this was much higher than expected and much higher than the prior quarter.
• 0:52
  Megan Horneman: So last quarter that's the fourth quarter it was 2%.
• 0:55
  Megan Horneman: For the quarter it jumped up all the way to 3.7%.
• 0:59
  Megan Horneman: So this is why the markets are selling off, because right now the expectation for Fed rate cuts are being pushed all the way out to December and you're going to hear that rhetoric heat up about potentially rate hikes.
• 1:11
  Megan Horneman: Let's dig a little deeper into the actual report of GDP.
• 1:14
  Megan Horneman: Personal consumption did make up a big portion of GDP, but it was all services.
• 1:20
  Megan Horneman: We actually saw declines in goods orders and durable goods orders.
• 1:25
  Megan Horneman: The service side of the economy this is what we talk about in this.
• 1:28
  Megan Horneman: Continued spending in services is something that presents a sticky inflation environment for the Federal Reserve.
• 1:35
  Megan Horneman: We also saw a big contraction in net exports.
• 1:38
  Megan Horneman: That means that we imported more goods than we exported, so that actually detracts from GDP.
• 1:45
  Megan Horneman: We also saw a deceleration in the inventory change as well, so that was part of the reasons for the weakness in growth when we look in that service component.
• 1:58
  Megan Horneman: So where is that spending concentrated in services?
• 2:01
  Megan Horneman: Household consumption is a big part of it.
• 2:04
  Megan Horneman: Household consumption is what you're spending on your utility bills, healthcare, transportation, recreation and then food.
• 2:12
  Megan Horneman: These are things that are in household consumption.
• 2:14
  Megan Horneman: All of these were made up the most of that.
• 2:17
  Megan Horneman: The other area is the financial services and insurance.
• 2:22
  Megan Horneman: So what is this?
• 2:23
  Megan Horneman: You're going to hear more about this, because these are insurance rates that are going up across the board, and this is a problem as well for the Fed, because this is something they can't control, but it goes right into that sticky service inflation.
• 2:36
  Megan Horneman: So think of banking services, insurance services, investment services, financial intermediation and then some other financial services are in this component.
• 2:46
  Megan Horneman: So what do we make of this report?
• 2:48
  Megan Horneman: First of all, bond yields.
• 2:49
  Megan Horneman: Long-term bond yields are up about 4.75% on the 10-year.
• 2:53
  Megan Horneman: As I mentioned, the Fed funds rate cuts are being pushed all the way out to December, if that even happens this year.
• 3:00
  Megan Horneman: We'll continue to watch this data going forward.
• 3:04
  Megan Horneman: Let's remember this was backward looking.
• 3:06
  Megan Horneman: It was just disappointing because the rally in the equity market, the optimism that we saw in the first quarter, it's not translating into the actual data that we got and as well the service numbers on the spending.
• 3:20
  Megan Horneman: This is tough for the consumer and as inflation continues to rise and wages real wages don't keep up with this, this is tough for the consumer and as inflation continues to rise and real wages don't keep up with this, this is problematic for the consumer and another reason why we think we'll see a slow down in that consumer as we go through the rest of this year.
• 3:34
  Megan Horneman: Stock markets don't like it, obviously either.
• 3:37
  Megan Horneman: We'll see how this ends up today.
• 3:38
  Megan Horneman: We'll be back tomorrow with another very important market moving event.
• 3:43
  Megan Horneman: That is, the Fed's preferred inflation measure, the core PCE.
• 3:47
  Megan Horneman: Thank you If you have any questions or comments, please feel free to reach out to podcast at verdence dot com.