The Whaley Report: State of the Union

the whaley report

It’s been several weeks since we took a step back and looked at the broad state of the markets, specifically developments in the US.

The last two weeks have been chock full of data and I thought it would be helpful to discuss the most important developments of the last couple of weeks in terms of both economic data as well as price action in US markets.

I disdain lagged data, except for the fact that markets typically overreact to such data and so provide the rest of us with an opportunity to put capital to work efficiently.

Case in point, GDP data. We received finalized first quarter GDP data the first week of June.  That’s right, we’re two-thirds of the way through the second quarter and we’re evaluating what happened in the first three months of the year and markets are reacting to it.

At my asset management firm, we have a proprietary process for modeling GDP in real-time which allows us to trade based on that data, in real-time. Not on a three-month lag.

That said, first quarter GDP data, which showed a quarter-over-quarter contraction, is significant for a couple of reasons. First, it will necessitate a change in the Fed’s forecast for 2015 GDP.

The core of its target is 2.5% GDP based on the March forecasts.  The risk is if they cut it to 2% at next month’s meeting. In addition, the Fed has underestimated the pace at which unemployment has fallen.  This suggests that Fed officials have not fully taken on board the slowdown in productivity.

The second reason that first-quarter GDP data was is worth paying attention to is that a contraction, if due to transitory factors, won’t prevent the Fed from hiking rates in either September or December. We know this is true because the Fed has been very direct about this fact.

In fact, the monthly labor data that we received last week – both ADP and NFP reports – reaffirm the generally healthy numbers for job creation, which suggests that the Federal Reserve’s plans to start raising interest rates remains intact. In addition, the jobs reports should quiet chatter that the US was going to slip back into recession after the contraction in the first quarter.

The employment data solidifies expectations that the economy is rebounding in the second quarter. There are a couple of other aspects of first-quarter growth that aren’t discussed, which generally means they’re the most important factors.

First, while the quarter over quarter growth rate showed a contraction of 0.7%, the year-over-year growth rate showed an acceleration to 2.4% from last quarter’s 2.3% annual growth rate. This fact is important because annual growth rates are less noisy than quarterly numbers.

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