Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, the leading wealth management and professional services group which is set to re-brand to Evelyn Partners this summer, comments on the latest US GDP data:
US annualised real GDP decreased by 1.4% in Q1 2022, below consensus expectations of 1%, and down from 6.9% in Q4 2021. Drags on GDP were driven by decreases in private inventory investment, a decrease in exports and an increase in imports, contributing -4% to the decline. The positive contributions came from personal consumption expenditures contributing 1.8% over the quarter driven by services.
Economic growth in the US was always set to moderate in the wake of the strong rebound in economic activity observed throughout 2021. In 2021 US real GDP grew 5.7% annualised, the largest increase since the 1984. However, as the economy has been heating up, inflation has also been rising and reached a 40 year high of 8.5% annual in the latest March reading. This is a concern to monetary policy makers who have a dual mandate of price stability and full employment.
The Federal Reserve is in a difficult position to try and bring inflation down without prompting a recession. The Fed has been signalling for some time that monetary policy tightening was imminent and enacted this at their 16 March meeting, raising interest rates by 0.25%. Since then, expectations for the rate of tightening have increased.
Central bank governors including Fed Chair Jerome Powell have suggested a 50bp hike at the next meeting (4 May) is a possibility. Money markets have extrapolated this sentiment and are pricing in 50bp hikes for the next three meetings and for rates to reach over 2.5% by the end of 2022.
Even with high levels of inflation and downside pressure on growth, the US economy looks unlikely to fall into recession. The year-to-date impact on US equities falling 5.5% (total return, GBP) has been driven mainly by monetary policy.
As interest rates rise the stocks with high valuations are more vulnerable to price declines as the discount rate applied to future earnings increases. Within US equities, there was a tilt away from the mega-cap and highly valued areas of the market to the less interest rate sensitive sectors.