IGI Logo

Below the Comment on USA GDP Data - 25 April 2024 by Dr. Vikas V. Gupta, CEO & Chief Investment Strategist, OmniScience Capital

Higher than Expected PCE Inflation Delays Rate Cuts, Yields Likely to Rise Further

In response to the unexpectedly high PCE inflation figures, it is now evident that the Fed's ability to act on rate cuts is contingent on a more benign PCE inflation outlook. This scenario supports the "higher for longer" narrative, naturally leading to higher yields. A higher core PCE inflation implies that yields will remain elevated until lower inflation figures materialize. However, if the economy appears notably weak, rate cuts could be considered even before inflation moderates. With a GDP growth rate of 1.6%, which may be below expectations but is still robust enough to dissuade rate cuts, the Fed is likely to maintain its current stance.

No sign of Stagflation

Concerns about stagflation are premature, as the higher inflation data appears to be an anomaly rather than a sustained trend. There are no underlying causes suggesting a prolonged period of high inflation and low growth in the US. Growth is expected to remain robust, with inflation likely to moderate over the next few quarters. While some interim data points may indicate otherwise, the overall trend is expected to remain positive for economic growth.

The latest job claims data indicates a positive trend, with initial applications for unemployment benefits dropping to 207,000 last week, the lowest level in two months. Continuing claims have also decreased. Consumption has proven to be more resilient than expected, despite predictions that spending would slow as households used up their savings from the pandemic period and borrowing costs remained high.

A major contributing factor to this resilience has been the strong labor market, which has led to increased job opportunities and wages. This has bolstered confidence that the economy is experiencing a "soft landing," where inflation decreases due to higher interest rates without causing a recession.

Equity Markets

Equity markets expected to adjust slightly lower but remain supported by strong economic conditions and company earnings

The impact on equity markets is expected to be minimal. While they may adjust slightly lower, the overall economic conditions are favorable, and companies' earnings growth is anticipated to continue, providing support to US markets. In contrast, the Indian economy's strength is even more pronounced, bolstering its markets. However, the "higher for longer" scenario could be a slight negative in the near term. The situation varies across the rest of the world, with local earnings growth and central bank policies playing key roles.

India

Indian economy poised for growth, likely to remain a bright spot

India is expected to remain a bright spot in terms of GDP growth and market strength, while the US will continue to be a favored investment destination due to the strength of its globally significant listed companies.

Above views are of the author and not of the website kindly read disclaimer