U.S. GDP slows sharply | Financial Post

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Wall Street was rattled by economic figures that showed exactly what stock traders did not want to hear: a significant slowdown in the world’s largest economy and persistent inflation pressures.

Stocks got hit across the board, with the S&P 500 extending its April plunge as the data fuelled “stagflation” jitters — bringing even more uncertainty to the the path of United States Federal Reserve policy. And swap traders reacted accordingly — pushing back the timing of the first rate cut to December. Treasuries sold off, with two-year yields spiking to five per cent.

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The latest economic data interrupted a run of strong demand and muted price pressures that had fuelled optimism for a “soft landing.” Gross domestic product increased at a 1.6 per cent annualized rate, trailing forecasts. A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7 per cent clip.

“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” said Chris Zaccarelli at Independent Advisor Alliance. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing.”

If neither are headed in the right direction, he said, then that’s going to be “bad news” for markets.

The S&P 500 slid 1.3 per cent, while losses in the Nasdaq 100 approached two per cent. Meta Platforms Inc. tumbled 15 per cent on plans to spend billions of dollars more than it previously anticipated amid its artificial-intelligence push. Treasury 10-year yields climbed nine basis points to 4.73 per cent. The dollar advanced.

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“Stagflation chatter will surely pick up in the wake of these figures, but we’re less concerned with such an outcome as long as the labour market remains so strong,” said Ian Lyngen at BMO Capital Markets.

To Jeff Roach at LPL Financial, the economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge.

“Savings rates are falling as sticky inflation puts greater pressure on the consumer. We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s two per cent target still looks a long ways off,” he noted.

In the short term, the numbers don’t appear to be a green light for either stock bulls or bears, said Chris Larkin at E*Trade from Morgan Stanley.

“The uncertainty is unlikely to ease pressures in a market experiencing its deepest pullback since last year,” he noted.

Zaccarelli at Independent Advisor Alliance says he’s looking ahead to Friday’s PCE numbers because slowing inflation is the number one issue for the Fed and the rate cut (or even rate increase) debate has been heating up and that’s what’s injected so much uncertainty into bond and stock markets lately.

Bloomberg.com

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