On Friday, BMO economists revised their outlook on the global economy, projecting a 3.2% growth for this year. This robust expansion is not significantly alleviating inflationary pressures, leading to a reassessment of the Federal Reserve's interest rate trajectory.
Chief Economist at BMO, highlighted the strength of the U.S. economy, with consumer spending and retail sales exceeding expectations in March, and a 4% increase from the previous year. This follows a series of strong economic indicators, including a solid jobs report and an unyielding consumer price index (CPI), which have caused market expectations for a Federal Reserve rate cut to diminish.
Federal Reserve Chair Jerome Powell acknowledged on Tuesday that it would take longer to be confident that inflation is under control. Echoing this sentiment, the President of the New York Fed mentioned the possibility of further rate hikes, although this is not the anticipated scenario.
This uncertainty has led to a sell-off in U.S. Treasuries, with yields on two-year notes approaching 5% and those on 10-year notes climbing to over 4.6% since the beginning of 2024.
Despite initial resilience, equity markets are showing signs of strain under the weight of persistent inflation and the prospect of continued restrictive monetary policy. The S&P 500, after a 10% gain in the first quarter and reaching a peak on the last trading day of March, is on the brink of a 5% decline after three weeks of losses. The Nasdaq, which set a record high just last Thursday, has quickly fallen by more than 6%.
The underlying issue, as outlined by Porter, is that economic growth remains too strong to significantly dampen inflation. The unemployment rate has slightly increased, but stable jobless claims indicate no significant economic stress. Consumer confidence is low, yet spending remains robust. Moreover, exports have performed well despite a strong dollar, buoyed by better-than-expected external growth.
The upcoming U.S. GDP report for the first quarter is expected to show a growth rate of 2.0% at an annual rate, suggesting a slowdown but not a weak economy. The core personal consumption expenditures (PCE) price index, set to be released next Friday, is forecasted to rise by 0.3%, which would slightly lower the annual rate to 2.7%, compared to the core CPI of 3.8%.
InvestingPro Insights
As investors navigate the current economic landscape, with a focus on inflation and interest rate trajectories, it is worth noting the performance of the S&P 500 (SPY). The index, a barometer for U.S. equity markets, has shown resilience in its dividend history, raising it for 14 consecutive years and maintaining payments for 32 consecutive years, according to InvestingPro Tips. This could signal a level of stability and investor confidence despite market fluctuations.
With a market capitalization of $498.41 billion and a low price-to-earnings ratio of 6.22, the S&P 500 stands as a testament to the strength of the U.S. economy highlighted by BMO economists. The revenue growth of 8.56% over the last twelve months as of Q4 2023 further underscores the economic momentum mentioned in the article. Moreover, the S&P 500's low price volatility might provide some solace to investors concerned about market uncertainty.
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