Market 04/25: Q1/2024 GDP rise fuels stagflation concerns

Auction of USD 44 billion 7Y Treasury Notes: positive results but demand slightly down

• High Yield: 4.716% (market yield: 4.716% | previous session: 4.185%)

  • Percentage awarded at High Yield: 35.06% (previous session: 63.66%)

• Bid-To-Cover Ratio: 2.47 (previous session 2.61)

• Awarded bid components (competitive - competitive results):

  • With 65.11% successful bid value from indirect bidders (previous session: 69.73%)

  • With 13.9% from Dealers (previous session: 12.86%)

• Although not at tail levels, this High Yield is still quite high for US public debt.

  • Today's yield was also pushed higher after a bond selloff wave early morning following the GDP report.

• The trend of declining bond demand is clear as dealer bid volume has risen sharply.

Q1/2024 GDP heightens stagflation risk concerns

Q1/2024 GDP heightens stagflation risk concerns due to: GDP lower than expected + still strong consumption making inflation potentially persistent.

GDP growth unexpectedly much lower than predicted (below 99.7% confidence interval)

• Real Q1 GDP increased +1.6% Q/Q, lower than +2.6% Q/Q estimate and down from +3.4% Q/Q previous quarter

• Q1 GDP even lower than lowest estimate (from SMBC Nikko) at 1.7% and vs. median 2.5%:

  • This figure is even outside the lower bound of 3 standard deviations (sigma), i.e., 99.7% confidence interval in forecasting models…

Low GDP growth trend influenced by short-term components (e.g.: reduced business inventory/reserve investment or net exports)

Meanwhile, GDP growth still driven by the economy's most important core components: Consumer spending + Residential investment + Business investment

• Fundamentally, not too many concerns for the current economic cycle (though market's stagflation fear reaction is quite sharp - see below).

Components dragging GDP growth mainly temporary changes due to sentiment and macro policy, including:

• Private inventories contribution to total GDP in Q1/2024 declined -0.3% Q/Q - second consecutive quarter of decline

  • This reflects private businesses' reluctance to hold inventories due to fear of sudden drop in goods demand.

    

• Net exports (trade balance) declined: due to falling exports and rising imports

  • This largely due to impact of stronger USD vs. other currencies.

    

Signs showing consumption still stronger than expected - concerns over persistent inflation

• Core personal spending (PCE index from GDP) still increased strongly in Q1 to +3.7% Q/Q

  • Note that the official March PCE report will be out tomorrow.

• However, personal consumption showed signs of slowing: Q1 increase +2.5% Q/Q, lower than estimate +3% and previous quarter's +3.3% Q/Q

  

• Domestic economic strength - "Core GDP" including consumption and fixed investment still increased strongly +3.1% Y/Y

Market reaction after GDP data: pricing in 1 rate cut in 2024

Market expectations for a September rate cut are fading

Market lowers expectations for rate cuts to 1 time this year.

Treasury yields up 7-10 bps on weak growth data and hotter inflation

Last week's jobless claims continue to hover around extremely low levels

• Initial jobless claims at 207,000, lower than estimate 215,000 and previous 212,000

• Continuing claims at 1.781 million, lower than estimate 1.814 million and previous 1.796 million

However…

• WARN layoff notices surging

• Job cuts (Challenger-Grey) in March hit 90,309 - highest since Jan 2023

US pending home sales surge in March to highest level this year

March pending home sales +3.4% M/M - strongest increase since Dec 2023, higher than estimate +0.4% and previous +1.6%

However, as mortgage rates rise, pending home sales likely to decline

Earnings reports: Meta, IBM, Ford

1. Meta

• Daily active users +7% Y/Y to 3.2 billion

• Ad impressions +20% Y/Y

• Revenue +27% Y/Y to 36.5 billion USD (0.2 billion above expectations)

• Operating margin 38% (+13pp Y/Y).

• EPS 4.71 USD (0.39 USD above expectations)

• FY24 capex guidance: 35-40 billion USD (FY23: 30-37 billion USD)

2. IBM

• Revenue: 14.5 billion USD, +1% Y/Y

  • Software: Revenue 5.9 billion USD

  • Consulting: Stable at 5.2 billion USD, showing recovery in digital transformation and technology consulting.

  • Infrastructure: Slightly down to 3.1 billion USD

• Diluted EPS: Up from 1.02 USD to 1.69 USD

3. Ford

• Revenue: 4.8 billion USD, +3% Y/Y despite a slight decrease in vehicle shipments.

  • Ford Pro: Revenue surges 36%, EBIT doubles due to high demand.

  • Ford Blue: Revenue at 21.8 billion USD; EBIT ~900 million USD.

• Key products:

  • Hybrid vehicles: Sales up 36%, targeting 40% growth with new hybrid models.

  • Ford Model e: EBIT -1.3 billion USD

• EPS: 0.33 USD

Other news

1. President Biden proposes capital gains tax of 44.6 - the highest in over a century

   • For high-net-worth individuals, unrealized gains are also taxed at 25%

2. US-China trade tensions escalate as the US is expected to pass a law banning TikTok from the US market

   • This could make US companies heavily exposed to the Chinese market, including Apple and Tesla, potential targets for retaliation.

   • E.g: Beijing's campaign to restrict access to advanced semiconductors, launching an investigation into chipmaker Micron Technology