GDP Will Set TheTone For The Quarter
Tomorrow at 8:30 a.m. Eastern time, the financial world will be on high alert as the Bureau of Economic Analysis unveils its first estimate of Q1 GDP. This figure holds immense significance, providing the most crucial snapshot of the economy’s macro status. Despite the possibility of revisions, this initial estimate offers Wall Street the most comprehensive view of the economy.
Investors and speculators have already taken their positions, with the bond market leading. The reason is apparent: Street will use this GDP reading to speculate on the Federal Reserve’s next move. A slowdown in GDP could prompt the Fed to ease its tight money policy. Conversely, robust GDP growth could signal the Fed’s decision to maintain or even raise interest rates, a scenario that Wall Street is not keen on.
So, we were presented with an irony: While the Street would like a moderately strong economy and especially strong earnings, it doesn’t want GDP so strong that the Fed continues to stand pat with its high (from the Street’s perspective) interest rate policy.
GDP has been notoriously difficult to predict over the past year. In 2023, the economy experienced a very tepid 2.1% growth in Q2, followed by a very strong 4.9% growth in Q3. GDP finished the year in 2023 with a solid 3.4% growth, so that’s the comparison for tomorrow’s reading (3.4%).
Unfortunately, almost no one believes that the economy is still growing at that rate. Virtually all analysts see the economy slowing; the average estimate is a 2.5% GDP growth rate. GDP Now, the rolling estimate of GDP by the Atlanta Fed, also sees a slowing economy, with its estimate at 2.9%.
I’m hard-pressed to find anyone who sees the economy getting more robust. Yet, it is not likely that the Fed will change its stance on interest rates; at least, that is how the bond market sees it. For the last couple of weeks, bond yields have been rising, partly because bonds see the Fed standing pat and partly as a reaction to that brief rally a few weeks ago anticipating a Fed rate cut.
Tune in tomorrow, an hour before markets in New York open, to see the most important data point of the quarter and an indication of the Fed’s future direction in interest rates.
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