Daily Brief - US Growth Numbers

TLDR: In the first quarter of 2024, the U.S. economy grew at an annual rate of 1.6%, below the expected 2.2%, marking the weakest growth in nearly two years due to a larger trade deficit and subdued inventory growth.

Despite the lower-than-expected headline GDP number, the underlying details of the report provide a more encouraging outlook on the American economy. Consumer spending increased by 2.5%, business investment climbed at a 5.3% pace and government spending also contributed positively at a 1.2% rate.

Looking ahead, there appears to be little risk of a recession in the near term, with the ongoing expansion now in its fourth year, supported by consistent consumer spending and favorable labor market conditions.

However, high borrowing costs continue to impact sectors like housing and manufacturing, which are sensitive to interest rate changes. If the Federal Reserve maintains elevated interest rates to combat previous inflation spikes, we could see further cooling in these key areas, potentially impacting broader economic growth.

Inflation and interest rates are thus the critical watch points. The resilience of the economy poses questions about whether inflation will decrease sufficiently to allow the Fed to lower interest rates. Any shifts in this area will be crucial in determining the trajectory of the U.S. economy through the rest of the year.

Scenario Spotlight: What's next for the 10Y?

The chart above show the historical 1-month response from the US 10Y post the past 20 episodes when the treasury's yield crossed above 4.7%.

Market Movers: Response from US Sectors

Here are the best and worst performing sectors on 1-month horizon, if 10Y yields remain above 4.7%:

Top 3 Performing Assets:

1. S&P Oil Gas Exploration & Production - 1.61%
2. S&P Health Care Equipment & Services - 1.20%
3. S&P Hardware - 1.02%

Bottom 3 Performing Assets:

1. S&P Telecom Select Industry Index - -3.37%
2. S&P Semi Select Industry Index - -1.88%
3. S&P Gold Miners - -0.22%

Earnings Spotlight: Microsoft reports tonight

As Microsoft gears up to release its Q3 earnings tonight, investors are watching closely, particularly for further growth in AI-driven Azure revenue. Analyst expectations are set at $2.83 earnings per share on $60.88 billion in revenue.

The spotlight will also be on Microsoft's commercial cloud revenue, projected to hit $33.93 billion. With tech giants fiercely competing to dominate AI solutions for enterprises, tonight's results could be pivotal for Microsoft's market position.