China Fund News Taylor
Brothers and sisters, tonight, the global capital market is a bit of a collapse.
U.S. stocks plummeted
At the start of tonight's U.S. stock market, the Dow plunged 600 points.
The Nasdaq fell more than 2% at one point, and then narrowed its losses as Nvidia bucked the trend and rose 3%.
Technology stocks fell broadly, with Facebook's parent company Meta plunging 10%.
European stock markets collectively dived.
It is gratifying that Chinese concept stocks bucked the trend and rose slightly, which is a good signal for Friday's A-shares.
Gold rose, and U.S. Treasury yields skyrocketed.
What's going on behind the scenes?
Behind the turmoil in the capital markets is a series of latest economic data from the United States that fell short of expectations.
The U.S. Bureau of Economic Analysis reported Thursday that U.S. gross domestic product (GDP) rose 1.6 percent year-on-year in the first quarter, seasonally adjusted, below economists' forecasts of 2.4 percent. GDP growth in the fourth quarter of last year was revised to 3.9% from 3.4%.
There is also some bad news on the inflation front.
Personal consumption expenditures (PCE), a key inflation variable for the Fed, grew at an annualized rate of 3.4% in the quarter, the biggest increase in a year and up from 1.8% in the fourth quarter. Excluding food and energy, core PCE prices rose 3.7% versus 3.4% forecast and 2.0% previously, both well above the Fed's 2% target. Central bankers tend to focus on core inflation as a stronger indicator of long-term trends.
The analysis pointed out that GDP data showed that the U.S. economy slowed significantly in the first quarter, due to rising inflation and cooling consumer and government spending.
A series of data suggests that the United States may have experienced stagflation, which refers to a situation in which inflation remains high while the economy slows or even stagnates.
After the release of the data, the swap market is no longer fully pricing in a rate cut by the Fed by December. In addition, traders expect the Fed's first rate cut to be delayed until December. Interest rate swap traders now expect the Fed to cut rates by only about 35 basis points for all of 2024, well below their forecasts at the beginning of the year, when more than six 25 basis point rate cuts were expected this year.
Traders are currently pricing in a 100% probability of a rate cut in December. While the GDP report showed that economic growth in the first quarter was weaker than most economists expected, traders were more concerned about another rise in core inflation data and a weaker-than-expected jobless claim. Higher inflation and a strong job market outweigh the impact of weaker consumption, and the rest of the discussion about stagflation is sure to increase after the release of these data, analysts said.
On the face of it, the figures in the GDP report suggest that the economy is slowing, which further proves the view that the Fed needs to cut interest rates in the near term, analysts said. However, once the impact of the import surge is ruled out, the details of the GDP report are solid. Judging from today's data, it is more important that the preliminary annualized quarterly rate of the core PCE price index in the United States rose to 3.7% in the first quarter. That in itself doesn't change anything, but it's a reminder that inflationary pressures remain. The debate about the Fed (cutting interest rates) still has a long way to go.
Brian Jacobson, chief economist at Annex Wealth Management, said GDP growth was lower than expected, but in terms of consumer spending, the services sector was growing but the goods were declining. Despite the overall weakness, domestic spending by households remains healthy. Unfortunately, spending on things like insurance and health care seems to be crowding out other spending. And the inflation data is not encouraging. The annualized rate of price growth in the services sector accelerated again to 5.4%, which made it a bit difficult for the Fed. Economic growth is starting to slow, while inflation has rebounded. This is the paradox that central bankers are most worried about.
Blessings to Friday's A shares!