Strong GDP Print Leads to Mixed Market Reaction

US economy grows by 3.2% in first quarter, crushing expectations, but composition of growth concerns markets. U.S. economic growth got a strong boost from inventories and trade in the first quarter, but both of these factors may weigh on growth later in the year. Consumer spending, arguably the most crucial component of GDP, grew at its slowest pace in six years— a worrying development for those who believe the ten year economic expansion may be nearing an end. Bond markets rallied on the day as shorter-term treasury yields fell 5 basis points while longer-term yields declined 3 basis points.

GDP deflator and PCE price index come in well below Fed’s target. Subdued inflation readings continue to apply downward pressure on Treasury yields and swap rates. Fed officials are unlikely to pursue additional rate hikes until they see clear evidence on  any additional hikes until they see a significant increase in inflation- even if growth is strong. Fed funds futures currently imply a greater than 70% likelihood of a Fed rate cut by 2020.

Equity markets close at new record highs in mixed session for risk assets. Despite the bearish sentiment evident in rates markets, U.S. equities embraced the surprisingly-strong GDP report. The S&P 500 and Dow Jones Industrial Average closed up 0.47% and 0.31% respectively. Meanwhile, European equities traded sideways with the FTSE 100 closing down 0.10% while the Euro Stoxx inched up 0.20%. US crude retraced some of its recent gains, falling 3.7%, as investors factored in potential supply increase from U.S. and OPEC producers.