Stocks rally on earnings and mixed data; Commodities rise

• Fed rate hike odds are now once again pricing in a quarter-point rate rise by mid-year
• Fed’s preferred core gauge of prices hit the quickest pace in a year
• 2-year Treasury yield rises 14.4 basis points to 4.095%

US stocks are rallying on strong earnings and on optimism that the economy will gradually soften and bring down inflation. The Fed will be able to move forward with one, perhaps two more rate hikes, but then that should be it. Today’s economic data painted a picture of an economy that is slowing down, inflation is temporarily accelerating, and the labor market is softening. 

This week, mega-cap tech crushed earnings, with Meta delivering the latest standout results.  Wall Street was positioned for something big to break this week and that didn’t happen.  The amount of risks on the table were plentiful: potentially further banking worries, a big tech disappointment, or division amongst Republicans.

US data

The first look at first quarter GDP showed the US economy grew at 1.1%, down from the prior quarter’s 2.6% reading and below the 1.9% consensus estimate.  It was a miss, but the whisper number was below 1.0%, so some traders viewed it as not such a bad number when you consider how strong the personal consumption figures were and overall resilience in the labor market.

Personal consumption rebounded from 1.0% to 3.7% in the first quarter. The consumer is spending on both goods and services and that should keep the inflationary pressures going a little while longer. The consumer is still in too good of shape for the recession to start in the second quarter.  GDP growth is about to flatline, but it might squeeze out a tiny gain this quarter. 

Oil

Crude prices are finding support after some mixed data continues to support the case for the Fed to remain in tightening mode.  The economy is heading towards a rough patch, but it might still have another good quarter left before a recession starts.  The crude demand outlook is all over the place given the economy is hitting stall speed, while airliners still remain optimistic for a busy summer travel period.

Oil should find strong support ahead of the $70 region when you consider OPEC+ low production levels, the US will eventually have to refill the SPR, as Europe’s growth forecast improves, and as China supports the real economy. 

Gold

Gold is struggling here as yields are surging as stagflation fears return.  Slower growth would normally mean safe-haven flow for gold, but not if it comes with stubborn inflation.  Metal traders can’t make a convincing argument for a run at record highs until disinflation trends are firmly in control.  The risks of a June hike could keep gold grounded and that might not get answered until a few more weeks. 

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