Last Week on Wall Street

Last Week on Wall Street - April 27th, 2024

S&P 500: 2.67% DOW: 0.67% NASDAQ: 4.22% 10-YR Yield: 4.66%

What Happened?

Stocks surged on Friday, with the S&P 500 and Nasdaq Composite recording their best week since November, fueled by strong earnings from Big Tech companies and positive sentiment despite negative news on inflation data. The S&P 500 rose by over 1% Friday, while the Nasdaq climbed 2% , marking its best daily move since February. The Dow Jones also saw gains, rising by 0.4%. The stellar performance was attributed to robust earnings reports from tech giants like Alphabet and Microsoft, with Alphabet surging over 10% on better-than-expected first-quarter earnings and authorizing its first-ever dividend and a $70 billion buyback, while Microsoft added nearly 2% after reporting strong fiscal third-quarter results and an acceleration in cloud growth.

Investors did not seem phased by March's core personal consumption expenditures reading, which showed an increase of 2.8% from a year ago, surpassing expectations. Personal spending also exceeded estimates, rising by 0.8%. These positive developments helped Wall Street recover from a down day, where the Dow slid by 375 points amid concerns over slowing growth and persistent inflation. Looking ahead, investors are eyeing upcoming earnings reports from technology giants Apple and Amazon, as well as the Federal Reserve's next rate decision due out Wednesday.

Throughout this week, all sectors saw gains, with Technology leading the way with a 3.8% increase, followed by Consumer Discretionary (+3.6%), and Industrials (+2.2%).


GDP Growth Slowed to a 1.6% Rate in the First Quarter, Below Expectations

  • Gross domestic product, a broad measure of goods and services produced in the January-through-March period, increased at a 1.6% annualized pace, below the 2.4% estimate.
  • The personal consumption expenditures price index, a key inflation variable for the Federal Reserve, rose at a 3.4% annualized pace for the quarter, its biggest gain in a year.

The key takeaway - The Bureau of Economic Analysis released first-quarter data showing weaker-than-expected U.S. economic growth, with gross domestic product (GDP) expanding at a 1.6% annualized rate, falling short of economists' projections of 2.4%. Consumer spending increased by 2.5%, below the Wall Street estimate of 3%, while fixed investment and government spending contributed to maintaining positive GDP growth. However, a decline in private inventory investment and increased imports offset some of the growth. Inflation concerns persisted, with the personal consumption expenditures price index (PCE) rising at a 3.4% annualized pace, its largest increase in a year, surpassing the Federal Reserve's 2% target.

The disappointing GDP data has implications for the markets, as it indicates slower economic growth coupled with persistent inflation. The core Personal Consumption Expenditures Price Index (PCE) inflation gauge rose at a 2.8% annual pace in March, surpassing both forecasts and the previous month's figure. This combination has led to uncertainty among investors, reflected in the adjustment of rate cut expectations. However, while concerns persist, the overall sentiment suggests that the Federal Reserve may not resort to rate hikes immediately. Despite the challenges posed by a potential reacceleration of inflation, the underlying data indicates that growth remains solid, and both consumers and corporations continue to exhibit strength and confidence in the future, providing some reassurance to the markets.


S&P Global Flash Composite PMI Slows

  • US S&P Global Composite PMI declined to 50.9 in April's flash estimate from 52.1, indicating continued expansion in the US private sector's business activity, albeit at a slower pace than in March.
  • S&P Global Manufacturing PMI dropped to 49.9 from 51.9 in the same period, signaling a contraction in the manufacturing sector's business activity, while S&P Global Services PMI edged lower to 50.9 from 51.7.

The key takeaway - In April, US business activity experienced a slowdown in expansion, with output rising at the smallest rate so far in the year. This deceleration was observed across both the manufacturing and services sectors, as new orders decreased for the first time in six months, driven by weaker domestic demand. While international demand remained relatively stable, concerns about securing new orders dampened business confidence, resulting in a five-month low in sentiment. Additionally, signs of weakening demand impacted employment, with companies scaling back hiring plans and witnessing a reduction in staffing levels, particularly in the services sector, to the largest extent since mid-2020.

The pace of inflation eased slightly in April, with input costs rising less sharply despite manufacturing input costs hitting a one-year high. Service providers noted higher staff and shipping costs but reported the second-lowest overall cost increase in three-and-a-half years. Output prices also increased at a solid but slower rate, with slower charge inflation observed across both manufacturing and services sectors. The US Manufacturing PMI signaled broadly unchanged business conditions in April, marking a three-month sequence of stagnation. However, US manufacturers faced challenges, including drawing down their stocks of purchases for the second consecutive month and facing spare capacity in supply chains amid muted demand for inputs.


Personal Consumption Index Rose 2.8% in March, More Than Expected

  • The core personal consumption expenditures price index excluding food and energy increased 2.8% from a year ago in March, unchanged from February and slightly higher than expected.
  • Personal spending rose 0.8% on the month, more than the personal income increase of 0.5%.
  • The personal saving rate fell to 3.2%, down 0.4 percentage points from February and 2 full percentage points from a year ago.

The key takeaway - In March, inflation remained persistent, as indicated by key measures such as the personal consumption expenditures price (PCE) index, which showed elevated price pressures. The index, excluding food and energy, matched February's level by increasing 2.8% from a year ago, exceeding expectations. Consumer spending, however, remained robust, with personal spending rising by 0.8% on the month, slightly surpassing forecasts. Despite concerns about inflation, investors responded with muted reactions, with Wall Street poised to open higher, and Treasury yields falling. Futures traders adjusted their expectations, raising the probability of two potential rate cuts this year to 44%. However, analysts cautioned against anticipating imminent rate cuts, emphasizing the need for further weakness in the labor market to trigger such actions.

The report indicated a mixed reaction in the market, with markets opening higher despite concerns about inflation. Treasury yields fell, reflecting investor sentiment, while futures traders slightly raised the probability of two potential rate cuts this year. However, analysts cautioned against expectations of imminent rate cuts, emphasizing the need for further weakness in the labor market to prompt such actions. The Federal Reserve continues to closely monitor inflation, particularly the core PCE, which adjusts for changes in consumer behavior, and places less weight on volatile categories like food and energy. While inflation remains above the Fed's target of 2%, policymakers are expected to hold interest rates steady through at least the summer, awaiting substantial changes in economic data before considering adjustments to monetary policy.


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