By Sunny Oh
The Atlanta Fed GDPNow shows first-quarter GDP estimates are
running at 2.8%
If the stock market needs a fresh catalyst after a lumbering
ascent to near records, there's one in the offing.
A first reading of U.S. economic performance in the first three
months of 2019 is set to be released next Friday. First-quarter
gross domestic product -- the official scorecard of the economy's
health--comes at a sensitive time for Wall Street investors, who
have pushed equity values higher, shaking off sluggish domestic
growth and the inversion of the yield curve last month--a reliable
recession gauge.
Against that backdrop, equity indexes have drifted to their
loftiest levels in six months, with bears arguing that it's only a
matter of time before an economic slowdown enveloping much of the
rest of the world takes hold in the U.S., while bullish investors
see few impediments to further gains if the Federal Reserve keeps
its interest-rate hike plans on hold for the near term.
"The soft-landing scenario is playing out for the global economy
and it is difficult at this point to see any risks on the horizon
that are big enough to drag the U.S. into a recession," wrote
Torsten Sløk, chief economist at Deutsche Bank, in a Thursday
research note.
"This backdrop of no recession and stable growth and low
inflation and low rates is bullish for risky assets, in particular
equities," he said.
Nicholas Colas, co-founder of market research firm DataTrek,
said sufficient economic momentum to support earnings growth will
be the key:
"US equities clearly like this outlook, as long as it comes with
enough economic growth to deliver earnings growth in 2H 2019,"
Colas wrote in a Friday research note, referring to the market's
belief that there won't be a rate hike by the Fed over the several
months.
That all makes Friday's GDP print uniquely interesting.
If Friday unveils a first-quarter GDP number that would put the
U.S. on track to hit 2% to 2.5% growth this year, it could briefly
silence near-term recessionary prognostications. Analysts polled by
MarketWatch expect a more muted 1.5% growth rate in the first three
months of 2019, but 2.3% rate for the full year.
So far, recent economic data support the bull thesis.
JPMorgan Chase & Co.'s proprietary purchasing managers index
rebounded to 52.79 in late March, from 52.12 in January, albeit
after sliding from a Feb. 2018 high of 54.78. Any reading above 50
indicates that global economic activity is picking up.
That more upbeat data, in part, has been reflected in other GDP
tallies.
The Atlanta Fed GDPNow first-quarter estimate, which
incorporates recent economic data to spit out relatively real-time
growth forecasts, has jumped to 2.8% on April 19
(https://www.frbatlanta.org/cqer/research/gdpnow.aspx), from an
incredibly low 0.3% on March 1.
See: Retail sales post biggest gain in 1 1/2 years, point to
rebounding economy
(http://www.marketwatch.com/story/retail-sales-post-biggest-gain-in-1-12-years-point-to-rebounding-economy-2019-04-18)
Global growth headwinds
Fears around a more sluggish global economy aren't going away
soon. The International Monetary Fund's spring meeting in
Washington saw the international lender cut its global growth
forecast to 3.3% in 2019, the third time in six months.
Moreover, the People's Bank of China said at its quarterly
policy update it would pare back its use of monetary stimulus
(https://www.scmp.com/economy/china-economy/article/3006404/chinas-central-bank-suggests-it-will-stem-flood-money-economy)in
the future to avoid overinflating the economy, and to prevent
another ramp-up in credit, after injecting cash into the financial
system earlier this year.
With debt levels running high, analysts say Beijing may have
less room to loosen the credit spigot this time around, a potential
disappointment for an export-dependent eurozone.
Room to rally?
But it isn't assured that a healthy first-quarter GDP can spark
another run for records for the Dow Jones Industrial Average ,
S&P 500 index and the Nasdaq Composite Index , which all stand
within shouting distance of all-time closing highs.
The S&P 500 is now less than a 1% away from its Sept. 20
record.
LPL analysts said the stock market has already priced in 2 to
2.5% growth for the full year of 2019.
Read: Global growth and stocks could be set for lift off, says
UBS
(http://www.marketwatch.com/story/global-growth-and-stocks-could-be-set-for-lift-off-says-ubs-2019-04-16)
Yield-curve inversion
Bond-market investors are beginning to acknowledge the so-called
green shoots in the U.S. and global economy, after disagreeing with
the stock-market's upward trajectory and its implied optimism over
the U.S. economy's prospects earlier this year.
It was only a month ago, the bond market had priced in a
precipitous drop in growth that could lead the Fed to embark on
rate cuts, effectively reversing its interest-rate normalization
cycle. Recession fears gained further traction in March after the
Fed's monetary-policy meeting, where it indicated it no longer
expected any rate increases in 2019, a further pivot from December
forecasts for two increases this year.
That triggered a slide in long-term bond yields, and a rally in
debt prices, pushing the 10-year Treasury note yieldbelow the
3-month bill on March 22, one of the most widely watched measures
of the yield curve's slope because the inversion of that spread has
preceded all nine recessions since 1955. Bond prices move inversely
to yields.
Since then, the 10-year yield has bounced back to finish at
2.56%, as of Thursday (Bond and stock markets were closed in
observance of Good Friday), more than 20 basis points from its
March lows, and steepening the curve along the 3-month/10-year
spread. Falling bond yields can sometimes reflect concerns about
flagging economic expansion and diminished fears of higher
inflation, while rising bond yields reflect expectations of an
uptick in economic activity.
"This re-steepening of the curve was driven by investors being
reassured about the US economy as March data - i.e. the first
un-distorted month since November - has been solid," wrote Hans
Mikkelsen, head of U.S. investment-grade credit strategy at Bank of
America Merrill Lynch.
Stat of the week
About 86% of fund managers in April's edition of the Bank of
America Merrill Lynch's global fund managers survey said they
didn't view the yield curve inversion in March as a sign of an
oncoming economic downturn.
Corporate earnings
Check out: Here are signs the 'worst is behind us' when it comes
to global economic gloom
(http://www.marketwatch.com/story/heres-one-way-for-investors-to-bet-that-global-economic-growth-is-bottoming-out-2019-04-02)
Some 150 S&P 500 companies are due to report next week,
including 12 constituents of the Dow. Those include Verizon
Communications Inc.(VZ), Procter & Gamble Co. (PG) and
Coca-Cola Co.(KO).
So far, 15% of the S&P 500 firms have already reported their
first-quarter results, with 78% of companies reporting
better-than-expected earnings.
To be sure, this reflects analysts' expectations for the
first-quarter to show the first overall earnings decline in three
years.
(END) Dow Jones Newswires
April 20, 2019 08:31 ET (12:31 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.