Stocks Hit as GDP Brings ‘Worst of Both Worlds’: Markets Wrap

(Bloomberg) — Wall Street was rattled by data that showed exactly what stock traders did not want to hear: a significant slowdown in the world’s largest economy and persistent inflation pressures.

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Stocks got hit across the board, with the S&P 500 extending its April slide — as the economic figures fueled “stagflation” jitters, bringing even more uncertainty to the path of Federal Reserve policy. Swap traders reacted accordingly — pushing back the timing of the first rate cut to December. Treasuries sold off, with two-year yields spiking to 5%.

The latest economic data interrupted a run of strong demand and muted price pressures that had fueled optimism for a “soft landing.” Gross domestic product increased at a 1.6% annualized rate, trailing forecasts. A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip.

“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” said Chris Zaccarelli at Independent Advisor Alliance. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing.”

If neither are headed in the right direction, he said, then that’s going to be “bad news” for markets.

The S&P 500 slid 1.3%, while the Nasdaq 100 underperformed as Meta Platforms Inc. plunged on plans to spend more than it previously anticipated amid its artificial-intelligence push. Both Microsoft Corp. and Alphabet Inc. are due to deliver earnings after the market close. The Dow Jones Industrial Average almost wiped out its gains for 2024.

Treasury 10-year yields climbed seven basis points to 4.71%. The dollar also advanced.

It appears economic growth is “coming back down to earth” after an unusually strong second half of last year, said Mike Reynolds at Glenmede.

The combination of slower growth and sticky inflation will undoubtedly increase the whispers around potential “stagflation risk,” potentially complicating the Fed’s job, according to Jim Baird at Plante Moran Financial Advisors.

“Stagflation chatter will surely pick up in the wake of these figures, but we’re less concerned with such an outcome as long as the labor market remains so strong,” said Ian Lyngen at BMO Capital Markets.

To Jeff Roach at LPL Financial, the economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge.

“Savings rates are falling as sticky inflation puts greater pressure on the consumer. We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s 2% target still looks a long ways off,” he noted.

In the short term, the numbers don’t appear to be a green light for either stock bulls or bears, said Chris Larkin at E*Trade from Morgan Stanley.

“The uncertainty is unlikely to ease pressures in a market experiencing its deepest pullback since last year,” he noted.

The biggest setback in the data is the acceleration in core inflation, according to David Donabedian at CIBC Private Wealth US.

“We are not far from all rate cuts being backed out of investor expectations,” he said, adding that it should force Chair Jerome Powell into a hawkish tone in next week’s Fed meeting.

Traders will scrutinize Powell’s comments for clues about the latest thinking around easing policy. He’s previously said that growth can run at a faster rate without stoking inflation.

Swap traders now see only about 35 basis points of Fed rate reductions for all of 2024, well below the more than six quarter-point reductions they expected at the start of the year.

“The main story remains ‘The Fed vs. The Economy’,” said Scott Helfstein at Global X. “The economy may be slowing, but is still winning.”

He believes the Fed is not apt to make any major moves ahead of the election in September or November. So, it comes down to the July and December meetings.

“There is a lot of data that will come out before December, but one cut in 2024 looks reasonable,” he concluded.

Zaccarelli at Independent Advisor Alliance says he’s looking ahead to Friday’s PCE numbers because slowing inflation is the number one issue for the Fed and the rate cut (or even rate increase) debate has been heating up and that’s what’s injected so much uncertainty into bond and stock markets lately.

Aside from the economic picture, the stock market sold off amid a plunge in its most-influential group: technology.

A disappointing earnings report from Meta Platforms has investors on edge ahead of results from some of the stock market’s biggest and most-important companies in the coming days.

Traders expect fresh insight into how broadly consumers and enterprises are adopting AI services — and what growth will look like from here.

Scrutiny will be intense after Meta revealed it will spend billions more dollars than expected this year — triggering a stock selloff.

Corporate Highlights:

American Airlines Group Inc. expects a return to profit heading into the busy summer travel season after bad weather and delays linked to air traffic congestion weighed on the carrier’s early-year results.
Southwest Airlines Co. is slowing growth, ending service at four airports and offering voluntary leaves to address “significant challenges” stemming from reduced deliveries of Boeing Co. planes.
Royal Caribbean Cruises Ltd. boosted its full-year profit forecast as demand for cruises continued to surge, prompting record price hikes.
Caterpillar Inc. reported first-quarter results that showed machinery sales slipping from a year earlier and warned that the trend is expected to continue in its second quarter.
International Business Machines Corp.’s weak consulting unit sales disappointed investors, overshadowing its acquisition of software firm HashiCorp Inc.
Ford Motor Co., rapidly retooling its electric vehicle strategy in a decelerating market for plug-ins, posted first-quarter results that beat expectations on strong sales of work trucks.
Merck & Co. raised its annual profit and revenue forecast as the blockbuster cancer drug Keytruda continued to dominate the treatment landscape.
Harley-Davidson Inc.’s first-quarter revenue beat estimates despite high borrowing costs and tighter consumer budgets.
First Citizens BancShares Inc., which scooped up Silicon Valley Bank after the lender failed last year, lifted its guidance for lending income for 2024.
Hertz Global Holdings Inc. reported a loss that was nearly three times worse than analysts expected as it accelerated sales of electric vehicles to reduce its fleet of Tesla Inc. models that have weighed on profits for the past year.
Xcel Energy Inc. is taking a first-quarter charge of $215 million related to its role in the worst wildfire in Texas history.
ServiceNow Inc. provided an outlook for sales in the quarter that fell just short of analysts’ estimates, suggesting that corporate budgets for software purchases remain tight. The shares declined about 5% in extended trading.
CVC Capital Partners increased the size of its initial public offering by €500 million ($536 million), and is likely to price the share sale in Amsterdam at the middle of an initially proposed range, indicating the depth of investor demand for the long-awaited listing.
BHP Group Ltd. proposed a takeover of Anglo American Plc that valued the smaller miner at £31.1 billion ($38.9 billion), in a deal that would create the world’s top copper producer while sparking the industry’s biggest shakeup in over a decade.

Key events this week:

Japan rate decision, Tokyo CPI, inflation and GDP forecasts, Friday
US personal income and spending, PCE deflator, University of Michigan consumer sentiment, Friday
Exxon Mobil, Chevron earnings, Friday

Some of the main moves in markets:

Stocks