foxex: Economy Sizzles

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Q1 Economy Surged but Inflation Lagged

Markets Closed

Dow
26,543.33 +0.31%

S&P
2,939.88 +0.47%

Nasdaq
8,146.40 +0.34%

VIX
12.65 -4.60%

INV Anxiety Index
102.71 Neutral

US 10-Yr Yield
2.505 -1.14%

Year-to-Date

Dow
26,543.33 +13.79%

S&P
2,939.88 +17.27%

Nasdaq
8,146.40 +22.77%

Russell 2000
1,591.82 +18.04%

Crude Oil
62.80 +37.12%

US 10-Yr Yield
2.505 -6.74%

Economic Growth Accelerates

U.S. Q1 GDP Better Than Expected

The big economic news on Friday happened shortly before the markets opened. First-quarter U.S. Gross Domestic Product (GDP), a primary measure of economic growth, came out much better than expected at 3.2% (annualized) against a prior consensus forecast of only around 2.5%. It was the best first-quarter growth since 2015. Aiding in this unexpected strength was both an increase in exports and a decrease in imports.

This upside GDP surprise helps put to rest both the Federal Reserve's and the markets' concerns about slowing economic growth, at least for the time being. Coupled with a U.S. stock market that's at or near new all-time highs, Friday's economic surprise is certainly good news for investors.

Here's a chart of real GDP quarterly changes for the past few years, from the U.S. Bureau of Economic Analysis:

But What About Inflation?

The Fed holds its next FOMC meeting next week, when it will once again decide on the forward trajectory of interest rates and monetary policy. The central bank is widely expected to hold rates steady once again. By themselves, Friday's strong GDP showing and recently surging equity markets might compel the Fed to rethink its dovish turn and interest rate halt that began early this year.

But persistently lagging inflation is likely the factor that will keep the Fed on its dovish path. Along with GDP on Friday, the Bureau of Economic Analysis also released personal consumption expenditures (PCE). The PCE price index (a key inflation indicator) increased only 0.6% in Q1 versus 1.5% in the previous quarter. Despite strong economic growth figures, inflation is apparently not keeping pace. This should continue to keep the Fed reluctant to raise rates or otherwise tighten monetary policy further.

Trump Halts Crude Oil Rally

President Trump said on Friday that he called OPEC and told the powerful group of oil exporting countries to lower fuel prices. This call occurs after the U.S. moved to tighten sanctions on Iran earlier in the week, which further boosted crude oil futures. Since late December, the price of crude oil has been on a sharp and steady rise, roughly mirroring the rise in equity markets. Trump's remarks on Friday prompted a drop of almost 4%, putting a clear damper on that rally.

Retailers Tumble on Amazon's Speedier Prime Shipping

Shares of both Walmart (WMT) and Target (TGT) took a dive on Friday after Amazon (AMZN) announced that it would be making one-day (instead of two-day) shipping the standard for Amazon Prime members. This new direction towards much swifter delivery times is expected to weigh heavily on brick-and-mortar retailers, whose key advantage of immediate gratification will be tested by fast shipping from Amazon.

Two Key Earnings Movers

Ford Motor Company (F) surged over 10% on Friday after the company posted better-than-expected earnings on Thursday night. Helping to drive the company's performance was a further strengthening in demand for its iconic F-Series pickup trucks.

Also on Friday, Intel tanked around 9% after the company projected a fall in revenue this year during its earnings report after hours on Thursday. Though the company beat slightly on both first-quarter earnings and revenue, the disappointing full-year revenue projection weighed heavily on investor sentiment.

Fed and Jobs in the Week Ahead

Next week will be jam-packed with key U.S. economic events and company earnings. Most importantly, we'll have the Fed's FOMC decision and press conference on Wednesday. It remains to be seen whether accelerated economic growth tempered by lagging inflation will affect the Fed's interest rate path going forward. The central bank has been dovish since the beginning of the year. Will this new data prompt more Fed dovishness, hawkishness, or have little effect at all?

On the first Friday of the new month, this time on Friday, May 3rd, we'll get the widely-watched U.S. jobs report for April. Last time around, we saw a big jobs beat. This time, consensus expectations are forecasting around 180,000 jobs created in the month of April.

Aside from the FOMC and U.S. employment report, we'll also see core PCE inflation data on Monday, U.S. consumer confidence numbers on Tuesday, and U.S. manufacturing PMI on Wednesday.

More News:

Chipotle Stock Breaks Down on Earnings and E. Coli Subpoena

M&A and Small-Cap Stocks Push Markets Higher

Amazon Stock at 7-Month High After Solid Quarter

Charts courtesy of www.koyfin.com

As mentioned, Ford Motor Company led U.S. stocks on Friday. But Capital One (COF) also made some large gains on earnings, as did Verisign (VRSN).

Also mentioned above, Intel got pummeled on its revenue projections, while Target was once again dragged down by Amazon.

Word of the Day

GDP

Given the big news today that the U.S. economy grew at a surprisingly brisk rate of 3.2% (annualized) in the first quarter, against a prior consensus forecast of only 2.5%, we've chosen GDP as our word of the day.

Gross Domestic Product (GDP) is a broad measurement of a nation's overall economic activity. GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. GDP includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted).

GDP may be contrasted with Gross National Product (GNP), which measures the overall production of an economy's citizens, including those living abroad, while domestic production by foreigners is excluded.

Though it has limitations, GDP is a key tool to guide policy makers, investors, and businesses in strategic decision making.

Today in History

photo courtesy cboe.com

April 26: 1973: The Chicago Board Options Exchange opens for trading, with call options available on 16 U.S. common stocks. For the first time, stock options are listed on a dedicated exchange and registered for trading in standardized form, creating a fair and orderly market. (Total volume on the first day: 911 contracts.)

http://www.cboe.com/AboutCBOE/History.aspx