Thursday will be the biggest day for the markets this week with the concurrent release of two key data points. The US reports flash Q1 GDP, expected at 2.3% compared to 2.6% prior. Alongside that is the release of Core PCE prices for Q1, which is a key data point followed by the Fed. There inflation is expected to affirm the downward trend at 4.1% compared to 4.4% prior.
The data isn’t expected to dissuade the Fed from its next hike, unless there is a significant miss on expectations. However, the consensus among economists is that the US will fall into some kind of recession later in the year. Meaning that Q1 could be the last time the US has a positive GDP result in some time.
Before the data release
Just ahead of the GDP figures, another key indicator for the economic health of the US and future business prospects will be released on Wednesday. Durable Goods Orders for March are expected to show a turn around to grow at 0.6% compared to -1.0% previously. But, when taking out transport and defense, core durable goods orders are expected to remain relatively unchanged growing at 0.1% compared to 0.0% prior.
Durable goods are a key indicator, because they represent large investments by businesses with the expectation of making a profit in the medium term. If businesses expect tough economic times, they will pull back on ordering durable goods so they can preserve cash. If businesses expect an uptick in buying, they will put in more durable goods to increase production and generate more profits.
It’s where you put your money
While many high-ranking CEOs (JPMorgan’s being the most outstanding) have talked about a pending recession, positive durable goods suggests that the businesses aren’t betting on a recession just yet. If businesses and consumers continue to spend, regardless of their expectations for the economy, then a recession can be avoided simply by momentum.
On the other hand, March might be an outlier, because of the SVB crisis. On the one hand, people were worried about the resilience of the banking system, but that was resolved by the end of the month. On the other hand, the Fed reversed its QT program, shoveling hundreds of billions of cash into the debt market. The cost for institutional borrowing dropped precipitously, and businesses might have jumped at the opportunity to do some buying before credit conditions were expected to tighten again. In fact, in April, the Fed returned to QT, and borrowing costs have started to rise again, which could mean that durable goods could reverse course.
The market reaction
In general, a beat of the data could lead to an initial move towards optimism, but would also likely increase bets of more tightening by the Fed. That could support the dollar and hurt equities. A miss of estimates could lead to investors reducing the likelihood of a Fed hike, and support the stock market at the expense of the dollar.
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