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Yesterday, the Bureau of Economic Analysis (BEA) reported that real GDP grew by 1.6%, putting the nominal size of the US economy at $28.2 trillion. While growth in the most recent quarter was below estimates, the US economy has been more robust than other leading economies over the last few years. It is worth contextualizing the US economic position within the global economy. To help us, we share a recent WSJ article by Greg Ip entitled Americas Economy Is No. 1.
For starters, the graph below from Ip’s article shows that since 2010, the US share of global GDP has risen by about 5% and now accounts for over a quarter of the world’s economy. It’s not just stronger growth in the US driving our gains. Consider that Japan, Europe, and the UK are growing much slower and therefore losing share. Further, China’s economic growth has slowed considerably. India is growing rapidly but only represents a minor share of the global economy.
While economic growth is helping the US, so are higher levels of inflation than the countries shown below. The author shares a critical caveat: “These figures are based on current prices and exchange rates. Using purchasing power parity, which adjusts for different price levels across countries, the U.S. share of world GDP would be lower and that of big emerging markets—such as China and India—much higher.”
What To Watch
Earnings
Economy
Market Trading Update
Last week, we noted that a short-term stock rally was likely after the 5.5% selloff from the recent peak. To wit:
“While it took longer than expected, that correction process arrived last week and continued earnestly, with the market falling to the 100-DMA. With the market short-term oversold, a reflexive rally in the next week is likely, with the 50-DMA being notable resistance. Investors should use any market rally toward 5100 to rebalance risk and hedge portfolios.“
On Friday, following blowout earnings from Google and Microsoft, the market challenged the intersection of the 20- and 50-DMA. With the market not overbought yet and the MACD “buy signal” approaching, the bullish case is building. However, the initial resistance of the 50-DMA could prove challenging.
Given the slate of economic data and the Fed meeting, this is a good spot to rebalance risks as needed, as we will likely see some selling pressure next week. The market is NOT overbought yet, which gives it some run to push higher, but the upside is likely limited this week unless the Fed unexpectedly cuts rates.
The Week Ahead
Between the Fed meeting on Wednesday and earnings and jobs data this week, market volatility could rise.
The Fed is expected to keep rates unchanged and will likely push back the timing of rate cuts to later in the year. However, a reduction in the amount of QT would not surprise us. As we wrote in Commentary from April 12:
Wednesday’s release of the Fed minutes implies the Fed will likely reduce the amount of QT as early as their next meeting. Currently, the Fed lets $60 billion of U.S. Treasury securities and $35 billion in mortgage-backed securities roll off their books each month. The minutes indicate that most officials favor reducing the Treasury rolloff amount by “roughly half.” Further, “the vast majority of participants judged that it would be prudent to begin slowing the pace of runoff fairly soon.”
Payrolls are expected to rise by 210k. While this is a good pace, it is below last month’s strong +303k. ADP and JOLTs will further illuminate the labor market situation. The graph below shows that last month’s +303k, matching the May 2023 number, is the highest in a year.
This will be the last big week of Q1 earnings announcements. Amazon, AMD, and Eli Lily will announce on Tuesday, and Apple will report on Thursday. In addition, as we saw last week, many smaller companies will also announce earnings throughout the week.
PCE Inflation
The month-over-month PCE price index and the core index were in line with estimates at +0.3%. Both figures were the same as last month. So, while progress on inflation has been limited recently, the PCE data is much less worrying than the CPI data earlier in the month. Bond yields fell slightly on this news. The chart below from the BEA shows that over the last six months, higher prices are almost entirely due to service prices (orange). Other than in February, goods prices (blue) in aggregate have been declining.
Trump Could Drastically Change The Fed
A Wall Street Journal article released Friday morning starts as follows:
Donald Trump’s allies are quietly drafting proposals that would attempt to erode the Federal Reserve’s independence if the former president wins a second term, in the midst of a deepening divide among his advisers over how aggressively to challenge the central bank’s authority.
The article should be taken with a grain of salt. Political candidates offer up many ideas. But, as we often find out, few come to fruition. However, given that Trump’s odds of winning the election are about 50/50 and the incredible importance of Fed policy on the markets and economy, it’s worth appreciating what he may be thinking about the Fed. The following paragraph describes Trump’s potential role in setting monetary policy.
Several people who have spoken with Trump about the Fed said he appears to want someone in charge of the institution who will, in effect, treat the president as an ex officio member of the central bank’s rate-setting committee. Under such an approach, the chair would regularly seek Trump’s views on interest-rate policy and then negotiate with the committee to steer policy on the president’s behalf. Some of the former president’s advisers have discussed requiring that candidates for Fed chair privately agree to consult informally with Trump on the central bank’s decisions, the people familiar with the matter said. Others have made the case that Trump himself could sit on the Fed’s board of governors on an acting basis, an option that several people close to the former president described as far-fetched.
Again, we caution you not to read too much into this article. First of all, these changes may not be the views of Trump but just those of his aides. Second, even if he wishes to enact them, Congress would likely have a say in the matter.
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