Q1 advance GDP was widely expected to be +3.1% growth for the quarter; as reported GDP up just 2.5% after Q4 2012 was up 0.4%. It is the advance report and subject to change next month when we see the preliminary data; nevertheless growth according to the report isn’t as strong as thought. The reaction wasn’t much compared to trade prior to the data; the 10 yr note prior to 8:30 down 1 bp at 1.70%, at 9:00 1.68%. Stock indexes were weaker before GDP but there was not much additional selling when the weaker data hit. The drop in defense spending outweighed the biggest increase in consumer spending in two years. Household consumption, which accounts for about 70% of the economy, climbed at a 3.2% rate following a 1.8% in Q4 2012. Based on the recent data the overall the economy has slowed growth, manufacturing and service data were softer than expected in March and businesses still not increasing borrowing, March durable goods orders released earlier this week were a lot weaker than forecasts. Higher payroll taxes, higher health care costs for businesses and individuals, and the sequester cuts designed by politicians to inflict the most pain on consumers are all dragging the economy down. On the other side; the increase in equity prices has emboldened consumer spending as well as continued low interest rates and rising home prices.
Will the stock market ever have a major decline as many believe? First off; I have no idea, but these days it does seem like nothing will interfere with the climbing prices of the key indexes. Simply stated, where else can investors go to earn any kind of return? The Fed and other central banks are keeping interest rates low with easing moves and lowering base lending rates to almost no cost. Now we find in a major report from Central Banking Publications of 60 central bankers said 23% of banks now own stocks in their portfolios. The central banks, supposedly charged with protecting the $11 trillion foreign exchange markets, are buying stocks in record numbers. Central banks’ policies are pushing the envelope, without almost free money the US and global economies, still on very soft footings, would be headed back to recession----Europe already back into another recession. I don’t recall ever in my career that central banks invested heavily in stock markets; the consequences of any misstep now are increasing, yet so far so good.
At 9:30 the DJIA opened -7, NASDAQ -5, S&P -2. 10 yr note at 9:30 1.68% -3 bp; 30 yr MBS price +17 bp frm yesterday’s close and +21 bp frm 9:30 yesterday.
9:55; the U. of Michigan consumer sentiment index was expected at 73.0 frm 72.3 at mid-month. The April final read was 76.4, a nice increase, but compared to the final March sentiment index it is lower than 78.6. The reaction pushed stock indexes higher; these days it takes very little to juice stocks while it takes a village to set off selling.
That so far today the stock market has not caved on the weaker Q1 GDP data released this morning is evidence of central banks’ influence on markets. As long as the Fed and other central banks keep adding more stimulus it appears, at least at a glance, that nothing about the state of the economy will have any lasting impact on the bull run in stocks. There is simply nowhere for investors to go----in a sense kind of like a no lose investment with the Fed back-stopping any decline in stock indexes. Interest rates holding well, that market also being propped up by the Fed. Technically, every one of our indicators still hold bullish outlooks for interest rates; that should continue, but substantially lower rates is conditioned on whether the US and global equity markets hold together.