Inflation and Interest Rates in Focus After GDP Report | Episode 126 | 04-25-2024

Discover the underlying factors that turned the stock market on its head with Megan Horneman, Chief Investment Officer for Verdence Capital Advisors, as she analyzes the latest GDP report in our segment, Markets with Megan. The forecasted economic growth of 2.5% fell short at 1.6%, and Megan dissects the contributing factors, from a significant contraction in net exports to a slowdown in inventory changes. The report's impact didn't stop at disappointing numbers; it sent investors into a frenzy, spiraling into a sell-off and escalating bond yields. Inflation rates rose to a troubling 3.7%, signaling that the Fed's next moves could lean towards hikes rather than anticipated rate cuts.

As Megan navigates the complexities of this economic data, she sheds light on the shift from goods to service-based spending and the potential for a persistently high inflation environment. The pressure is mounting in financial services and insurance, where the Fed's control is limited yet directly impacts consumers. With long-term bond yields reaching 4.75% and speculation about delaying Fed fund rate cuts, the market's optimism from the previous quarter seems to have hit a wall.

It's being called the worst of both worlds. 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. Let's dig into these details. 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. So let's dig right in. First of all, the number came in weaker than expected. So the expectation was for two and a half percent growth in the first quarter. We got one point six percent. But that's not really what sent the shockwaves through the market. The big, the big number in this was the core PCE. This is inflation. In the first quarter this was much higher than expected and much higher than the prior quarter. So last quarter that's the fourth quarter it was 2%. For the quarter it jumped up all the way to 3.7%. 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.

Let's dig a little deeper into the actual report of GDP. Personal consumption did make up a big portion of GDP, but it was all services. We actually saw declines in goods orders and durable goods orders. The service side of the economy this is what we talk about in this. Continued spending in services is something that presents a sticky inflation environment for the Federal Reserve. We also saw a big contraction in net exports. That means that we imported more goods than we exported, so that actually detracts from GDP. 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.

So where is that spending concentrated in services? Household consumption is a big part of it. Household consumption is what you're spending on your utility bills, healthcare, transportation, recreation and then food. These are things that are in household consumption. All of these were made up the most of that. The other area is the financial services and insurance. So what is this? 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. So think of banking services, insurance services, investment services, financial intermediation and then some other financial services are in this component.

So what do we make of this report? First of all, bond yields. Long-term bond yields are up about 4.75% on the 10-year. As I mentioned, the Fed funds rate cuts are being pushed all the way out to December, if that even happens this year. We'll continue to watch this data going forward.

Let's remember this was backward looking. 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. 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. Stock markets don't like it, obviously either. We'll see how this ends up today. We'll be back tomorrow with another very important market moving event. That is, the Fed's preferred inflation measure, the core PCE. Thank you If you have any questions or comments, please feel free to reach out to podcast at verdence dot com.