U.S. Stocks May Lag Europe Even as the USD Gains on the EUR
By:Ilya Spivak
U.S. GDP data offers muddy signals on economic growth, inflation trends.
Incoming U.S. PCE inflation data unlikely to change much on Fed rate cuts.
Stocks and currencies in Europe and the U.S. may be setting up to diverge.
The markets struggled with what to make of first-quarter U.S. gross domestic product (GDP) data.
At the headline, output growth registered at the paltry annualized rate of 1.6%, far lower than analysts’ baseline forecast of 2.5% and even the most pessimistic model from the Federal Reserve, which called for 1.7% ahead of the release. Meanwhile, the core inflation component surged to a blistering 3.7% from 2.0% in the prior quarter.
A look under the surface appears to reconcile these disparate outcomes. Consumption–the main driver of economic growth–cooled off a bit but still looked generally strong. The main downdraft came from the external side of the equation. Trade shaved off 0.86 percentage points from headline growth as imports surged.
Stocks dropped and Treasury yields rose when the data crossed the wires as bubbly price growth nudged Federal Reserve interest rate cut expectations in a hawkish direction. Fed funds futures now price in just 29 basis points (bps) in easing for 2024, implying one standard-sized 25 bps reduction and a meager 16% chance of a second one.
Wall Street was quick to recover, however. The bellwether S&P 500 stock index began to recover within two hours of the data release. Within five hours, its GDP-inspired losses were erased. The intraday see-saw now has equities on pace to finish the session little-changed.
From here, the March edition of the Fed’s favored personal consumption expenditure (PCE) measure of inflation rounds out the week in economic data releases. Headline price growth is seen rising to 2.6% year-on-year from 2.5% in February. The core rate excluding volatile food and energy is also penciled in at 2.6%, down from 2.8% previously.
The PCE measure can be calculated with relative accuracy having seen consumer and producer price index (CPI and PPI) numbers for the same period, so a significant deviation from median projections seems unlikely. Absent an eye-catching deviation and with a Fed rate decision due May 1, the markets may opt to look through this release.
On balance, the main takeaway from this week’s news-flow seems to be the widening disparity between the U.S. and Europe. Purchasing managers index (PMI) data published early in the week revealed cooling momentum in the former–an assessment broadly underpinned by the GDP results–and a firming recovery in the latter.
Meanwhile, the inflation picture is diverging in the opposite direction. Eurozone consumer price index (CPI) data due next week is expected to put price growth at 2.4% year-on-year in April, matching the four-month low set in March. That is a stark contrast from the perky price readings on display across the Atlantic.
Taken together, this has made for a yawning spread in monetary policy expectations. The European Central Bank is priced to deliver three rate cuts against the Fed’s one. This seems to set up a favorable backdrop for the U.S. dollar, but Wall Street may find itself lagging share prices on the Continent (ETF: EZU).
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
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.