Wall Street Frontline｜Peter Cardillo: The Fed will not cut rates in May or June

According to an initial estimate the Bureau of Economic Analysis released on Thursday April 25th, Inflation-adjusted gross domestic product grew at an annualized rate of 1.6% in the first quarter, which is 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.

On the other hand, On Wednesday April 25th, Meta Platforms Inc. experienced a significant drop in its stock price during after-hours trading, following the release of its first-quarter earnings. Investors were concerned by Meta's increased capital expenditure forecast for the year, which reflected higher spending on artificial intelligence infrastructure and more loss on Metaverse.

What are the highlights of this week’s stock market? How will recent economic data affect the market performance? In this episode of Wall Street Frontline, we invited Spartan Capital Securities’ Chief Market Economist, Peter Cardillo to talk about these topics.

Wall Street Frontline: First question, could you please just give an overview of this week's stock market performance. What factors are influencing the market this week?

Peter Cardillo: Yeah, I think it's all about earnings, of course. We had GDP data which the market did not like, and the reason for that was because the economy grew in the first quarter sharply less than in the previous quarter. Additionally, this was accompanied by higher inflation. Consequently, the bond market reacted—interest yields rose, bonds went down, and the stock market followed suit.

Wall Street Frontline: Did you observe any particular trends in this earning season?

Peter Cardillo:  Right, in fact, the news from Meta and IBM came out the day before the GDP numbers were released, and that was another problem for the stock market in general. I mean, earnings so far have been quite good. Most companies have beaten market expectations, and even some companies that have beaten expectations, their revenue may have slipped a bit, or their forecasts were a little on the weak side. And so, they were basically punished by investors. But by and large, I would say most of the sectors that have released their earnings, they've been pretty good.

Wall Street Frontline: You just talked about the first quarter GDP growth. According to the economic report released this Thursday, US economy grows at 1.6% in Q1, which is below the expectation and also is the lowest number in almost two years.

Peter Cardillo:  Well, somewhere along the line, the high cost of money does have an impact, and I think we saw that in the first quarter. Unfortunately, it's not impacting inflation itself. But in general, I think that the particular decrease that we saw in Q1 is not likely to be repeated in Q2. So more or less, I would say that we're probably going to grow around 2% for the balance of the year, an average of 2%, and that's pretty solid growth. Of course, you know the problem is inflation remains elevated.

Wall Street Frontline: What factors have contributed to the drop of Q1's GDP growth? why do you think the growth rate is slow?

Peter Cardillo:  Well, we had a fairly substantial pullback in consumption. Consumers pulled back from the fourth quarter of last year, and again it goes back to a high cost of money. If interest rates stay elevated or if they should go a bit higher, which I don't think they will, but if they should, obviously, disposable income evaporates.

Wall Street Frontline: As US GDP slows down, another important key indicator for Federal Reserve, the core PCE, rose at 3.7% annual rate in Q1, which is above 3.4% expectation. How do you think the GDP, as well as the core PCE, together will affect the trajectory of Federal Reserve interest adjustments?

Peter Cardillo:  Well, I don't think we're going to see an interest rate decline next week when the Fed meets, nor do I anticipate one in June. If inflation remains at these levels through the second half of the year, there's a good chance that we won't see any interest rate cuts in 2024. However, I don't foresee any rate hikes unless inflation surges to post-pandemic levels. If that happens, then the Fed would indeed need to raise rates, but I don't believe that's likely to occur. Even though today's PCE figures came in a bit higher than expected, when you examine the annual growth rate of headline inflation, it's still under 3%, and the core rate is under 4%. This suggests to me that we are not on the brink of entering an era of runaway inflation like the 1970s.

Wall Street Frontline: If there's no interest rate cut within 2024, then it's going to be a surprise for the market. Because in the beginning of this year, the market has priced in like six or seven times of interest rate cuts. How do you think this surprise would impact the market?

Peter Cardillo:  I think the market, particularly the bond market, has certainly recognized the possibility of no rate cuts this year, and the stock market is aware of this as well. It all hinges on earnings—the basic fundamentals of the stock market. While this doesn't necessarily mean we're headed for a strong rally, it also doesn't imply a significant pullback. In fact, the pullback we experienced was mostly due to technical factors in a market that was overbought. Now, of course, we're responding to the good earnings.

Wall Street Frontline: So what factors do you think will be important to watch in the next couple of weeks?

Peter Cardillo: Earnings, and of course, from a macro standpoint, next week marks the start of a new month which brings with it several key economic indicators. We will see the latest unemployment numbers followed by the Consumer Price Index (CPI) and the Producer Price Index (PPI). Then, towards the end of May, we will once again review the Personal Consumption Expenditures (PCE) index. These data points are crucial for understanding the economic landscape.