Solid Economic Data Propels Market Rally

The recent economic landscape has been marked by growing concerns about a rising rate environment and inflationary pressure. However, despite these challenges, the economy has displayed resilience and unexpected strength.

GDP Growth and Consumer Spending:

The Commerce Department’s third estimate of first-quarter gross domestic product (GDP) revealed on Thursday a 2.0% annualized growth rate, surpassing expectations of 1.4% and compared to 2.6% growth in the fourth quarter. This upward revision can be attributed to upgrades in consumer spending and exports.

Corporate Profits and Employment:

Corporate profits dropped for a thirds straight quarter; however, the decline in the first quarter was not as severe as initially estimated. After-tax profits, excluding inventory valuation and capital consumption adjustment, contracted at a rate of 1.2%, instead of the 2.1% estimated pace.

The Labor Department’s surprising report reported an unexpected reversal in jobless claims, countering a recent surge. The heightened figures had prompted some economists to speculate that layoffs were on the rise as the economy began feeling the impact of significant rate hikes by the Federal Reserve.

For the week ending June 24, initial claims for state unemployment benefits witnessed a notable decline of 26,000, reaching a seasonally adjusted figure of 239,000. This drop marked the largest decrease since October 2021, signalling a positive shift in the labour market. In May, the unemployment rate stood at 3.7%. The persistent robustness in the labour market is playing a crucial role in defying recession predictions.

Inflationary Pressure and Central Bank Actions:

Both Jerome Powell of the U.S. Federal Reserve and Christine Lagarde of the European Central Bank emphasized the importance of conquering inflation at the ECB’s annual gathering at Sintra. In response to rising inflation, the Federal Reserve is considering resuming rate hikes.

Inflation by the Fed’s preferred personal consumption expenditures index rose last month at a year-on-year pace of 3.8%, data Friday showed, easing from April’s 4.4% pace. Underlying core inflation rose 4.6%, a touch less than the 4.7% economists expected. Futures tied to the Fed’s policy rate, which had before the data priced in a nearly 90% chance of a July Fed rate increase, now reflect about an 85% probability.

The Personal Consumption Expenditures (PCE) index continues to exceed the Fed’s target of 2%. Futures tied to the Fed’s policy rate, which had before the data priced in a nearly 90% chance of a July Fed rate increase, now reflect about an 85% probability.

Economic Resilience and Recession Outlook:

Despite concerns, the economy has defied predictions of a recession. Resilient labour market strength and robust consumer spending have played a significant role in maintaining economic momentum. Economists question the inevitability of a recession and consider the possibility of a soft landing for the economy, given the current signs of resilience.

Source: TradingView

Technical Analysis Perspective:

The broader S&P 500 index which gives a better representation of the overall U.S. economy has bottomed in October 2022. The emergence of higher highs and higher lows on the daily chart and the recent break above key resistance of 4,325 suggests that the index is trading in an intermediary up trend.

The Relative Strength Index indicator has improved significantly and is now trading in its bull market range. These positive developments on the chart suggest that further upside in the 4,530 – 4,600 range is feasible over the medium-term.

Conclusion:

The economy faces challenges associated with a rising interest rates and persistent inflationary pressures. However, it has demonstrated resilience through encouraging GDP growth, moderate corporate profit declines, positive labour market dynamics, and robust consumer spending. As the Federal Reserve monitors inflation indicators, the path of future interest rate hikes remains a focal point. Despite uncertainties, the economy’s resilience raises questions about the likelihood of an impending recession, suggesting a potential soft landing instead.

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