GDP Dipped in Q1

The release of US adv Q1 GDP yesterday fuelled a sharp recovery rally in global asset prices. At first look, GDP was seen printing just 1.1% in Q1, down firmly from the prior quarter’s 2.6% level and well below the 2% level the market was looking for. With slowdown fears a key focus at the moment, yesterday’s data serves as a strong indication that the US economy might well be headed for a contraction over the remainder of the year. Notably, the data shows that the US economy was already struggling prior to the SVB collapse and banking sector turmoil which kicked in late in the quarter and over early Q2.

Fed Rate Expectations Fall Back 

Despite the data, stock markets were seen rallying as traders paired back their Fed rate hike expectations beyond next week’s meeting. While a further quarter-point hike from the Fed is still widely expected next week, traders are now looking for a more muted outlook from the Fed beyond that meeting with pricing for rate cuts later in the year continuing to grow. There were some bright spots in the report, however, with consumer spending seen rising 3.7% over the period driven by strong spending activity in January. However, business investment was a big drag on GDP. Residential investment in particular was seen falling 4.2%. Inventories were another big drag on growth, falling 2.6% over the quarter.

Upside Risks for Stocks 

Near-term, stocks look likely to gain further as the US recession narrative feeds into reduced Fed tightening expectations. With easing expected later in the year, stocks should remain fairly well supported barring any escalation or return of the US banking sector crisis.

PCE Next 

Looking ahead today, focus will shift to the core PCE data for last month. In line with the falls we have seen in inflation, today’s data should further support the idea of the Fed easing away from rate hikes beyond next week’s meeting, allowing stocks room to rally further.

Technical Views

S&P 500

The rally in the S&P has seen the market stalling into a test of the 4153.50 level. While within the bull channel, the outlook remains in favour of an eventual break higher here and a move up towards the 4305 level next. To the downside, any correction from current levels will see the channel lows and 3910 area come into play as the next support to watch.