Market Update | April 27, 2018

Macro View

Daily Insights

  • Economy slows, with little expected impact for the rest of 2018. The U.S. economy grew at 2.3% in the first quarter, better than the consensus estimate of 2.0% but a slowdown from the near 3% growth of the prior three quarters. Persistent problems with seasonal adjustment of first quarter data and a lull in consumer activity after some spending was pulled forward in the fourth quarter, likely due to post-hurricane recovery and anticipated tax gains, all weighed on first quarter growth. We continue to expect U.S. growth to accelerate over the rest of the year as these temporary factors roll off, with a strong job market, fiscal stimulus, and consumer and business spending providing potential support for global demand.
  • First quarter inflation data from the gross domestic product (GDP) report as expected. Most importantly, the data appears to be sufficiently strong to keep the Federal Reserve (Fed) on track for two, or possibly even three more rate hikes in 2018. The core personal consumption expenditures (PCE) reading for March of +2.5% was in line with consensus forecasts and up from +1.9% in the fourth quarter. Another inflation measure the Fed follows, the Employment Cost Index, rose 0.8% quarter over quarter, above consensus forecasts (0.7%). Private sector wages and salaries rose 2.9% year over year, the most of the expansion and following a 2.8% increase in the previous quarter. The bond market is still pricing in a slightly higher probability of three or fewer total Fed rate hikes this year versus four or more, but this latest batch of inflation data may tilt the odds a tiny bit more toward four rather than three.
  • Earnings continue to impress. Over half of S&P 500 Index constituents have officially reported first quarter earnings, and results have been quite strong. According to Thomson, the blended earnings growth rate is nearly 23%, well above the 18.5% expected this time last week and the 12.2% expected at the start of the quarter. A stellar 80% of companies have beaten consensus estimates, better than the 75% average over the past four quarters and the 64% long-term average. We continue to expect strong corporate profits to support solid stock market gains in 2018.
  • North and South Korea end the Korean War. Leaders of the two countries have agreed to end the 65-year Korean War. Additionally, Reuters is reporting that North Korean leader Kim Jong-un declared an immediate suspension of nuclear and missile tests, and will instead pursue economic growth and peace. This comes ahead of the U.S.-North Korean summit slated for late May or early June. This appears to be a major positive development; we will continue to monitor closely.

Monitoring the Week Ahead

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