The major indexes are on track to start today’s session in the green, which would follow the market’s impressive gains on Tuesday. Positive momentum in oil prices is giving today’s market action a favorable nudge.
The data docket is relatively on the light side today, with the April trade deficit level coming in lower than expected. This is a net positive for the GDP numbers, though that will be the Q2 GDP and not the Q1 numbers.
We will get getting the first revision to the Q1 GDP read, which originally came in at +0.5%, but is now expected to get revised higher to +0.9% on greater momentum in consumer spending. The Atlanta Fed’s GDPNow feature currently puts Q2 GDP growth at +2.5%, which will likely go up slightly with today’s lower than expected April trade deficit reading.
I have been hesitant to read much into the markets’ strong Tuesday gains and indications of a positive open today. Some in the market are interpreting this behavior as indicative of the market’s growing comfort level with the idea of a more hawkish Fed, particularly a June rate hike. I agree with the view that interest rate hikes aren’t necessarily bad for stocks. But that is true only when rates are rising in response to a surging economy and growing signs of pricing pressures, which provide for an impressive earnings backdrop for companies.
That’s not the case at present, when the Fed will be raising rates because they need to move away from the extraordinarily accommodative policy of the last few years. The expected GDP growth of +2.5% is no doubt an improvement over what we saw in Q1, but hardly the type of surge that will drive the corporate sector’s earnings power. In other words, it is good if market participants are getting comfortable with a June rate hike. But it is nevertheless net negative for stocks.
In corporate news, we have a major M&A deal in the technology space, with Hewlett Packard Enterprise HPE selling its technology services operations to Computer Sciences Corp (NYSE:CSC) CA for $8.5 billion. This deal follows last year’s break-up of Hewlett Packard into HP Inc. HPQ and Hewlett Packard Enterprise.
The HP Enterprise entity has been focused on business customers, but dealing with a competitive operating environment where clients were being stingey with capital budgets and the cloud computing opportunity has effectively become a slugfest with the likes of Amazon (NASDAQ:AMZN) AMZN, Microsoft (NASDAQ:MSFT) MSFT and others. Today’s sale of the services unit to Computer Sciences likely indicates that HPE is giving up on cloud computing.
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