Stocks May Fall If U.S. GDP Data Undercuts Fed Rate Cut Hopes
Stocks May Fall If U.S. GDP Data Undercuts Fed Rate Cut Hopes
By:Ilya Spivak
Stock markets are hoping that soft U.S. GDP data will help keep Fed interest rate cuts on the table for 2024. They may be disappointed.
- Wall Street is embracing a “bad is good” view of U.S. economic news.
- Q1 GDP data in focus as markets hope to keep rate cuts on the table.
- Annualized growth of 2.4% or higher may be trouble for risk appetite.
Financial markets seem to be embracing a “bad is good” interpretation of U.S. economic data once again.
The release of unexpectedly soft April purchasing managers index (PMI) data this week was a telling case in point: stocks surged, and the dollar tumbled as the numbers offered a bit of relief for traders worried about evaporating interest rate cut odds.
The baseline outlook priced into Fed Funds futures has undergone a dramatic transformation since the start of 2024. The year opened with markets envisioning six 25-basis-point (bps) rate cuts. That stood in stark contrast to official projections from the Federal Reserve, which penciled in three cuts or 75 bps in easing in late December.
Stock markets at the mercy of Fed rate cut bets
Since then, a steady stream of stronger-than-expected economic data—most potently, three back-to-back consumer price index (CPI) inflation readings registering hotter than analysts anticipated—has eaten away at the markets’ dovish stance. That proved to be digestible for markets while the priced-in view landed on the dovish side of the central bank.
And then, it wasn’t.
The turn of the switch came as the Fed issued an updated Summary of Economic Projections (SEP) on March 20, where it stuck to its guns on 75bps in rate cuts for 2024. The markets signaled their position just two days before that, pushing the priced-in view to 61 bps to mark the first time this year that the probability of a third cut fell below 50%.
As the dust settled and traders digested what transpired in the subsequent 24 hours, the bellwether S&P 500 stock index put in the top on a blistering five-month rise from late October 2023. It has since shed as much as 6.75% and is now trading down 4.2% after a tepid bounce this week.
U.S. GDP data: Wall Street praying for weakness?
The release of first-quarter U.S. gross domestic product (GDP) data is the next chapter in this story.
Experts expect GDP data to show that the annualized growth rate slowed to 2.5% from 3.4% in the three months to December. That would put growth on a hotter trajectory than the Fed’s 2.1% median forecast for the year, undermining the case for rate cuts.
Projections from the Fed’s Atlanta, New York, and St. Louis branches—the three most closely watched “nowcast” models trying to guesstimate GDP based on incoming economic data—range from 1.7% to 2.7%, offering little clarity. Analytics from Citigroup show that U.S. data outcomes have cooled relative to forecasts however, warning of a soft result.
The Fed penciled in a range of 2.0% to 2.4% as the “central tendency” for GDP growth this year. That it’s median was 2.1% implies a skew toward the lower end. On balance, this suggests that even a slightly weaker than expected outcome of 2.4% or anything higher might force a hawkish rethink. That would bode ill for stock markets.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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