Market Minute

Alphabet (GOOGL) and Microsoft (MSFT) have had impressive earnings announcements, which boosted the equity futures markets significantly. However, we cannot overlook the significant issue at hand: the GDP data and the inflationary pressures that have reemerged over the past several months. Yesterday's GDP figure was unexpectedly low, sparking speculation about the U.S. potentially entering a stagflation environment. Let’s look at what stagflation means.

Stagflation is a scenario in which an economy experiences slower growth while inflation continues to rise or remains at elevated levels. A key factor that divides economists and economic pundits is the labor market component. Some argue that stagflation involves slowing economic growth (using GDP as the metric) combined with rising inflationary measures such as the Consumer Price Index (CPI) or the Personal Consumption Expenditures (PCE). Others add labor market deterioration along with the other broad-based guides to define stagflation. This is why some analysts are starting to discuss the stagflation narrative. However, any declaration of stagflation at this point, with such limited data and duration, is premature.

The Advance GDP estimate was significantly lower than market expectations, but this figure will be revised twice over the next two months, so adjustments to the preliminary number should be anticipated. The notes that the Advance GDP print includes incomplete data or data subject to revisions. According to the Bureau of Economic Analysis which publishes the GDP dataset, the average revision between the Advance GDP data and the first revision is 0.5%. For perspective, yesterday’s figure could be significantly adjusted either upward or downward. Furthermore, the average adjustment between the first revision (secondary) print and the final GDP print is 0.3%. These revisions occur over two months, making it far too early to determine stagflation. Similarly, it would be prudent to wait for two finalized GDP prints before using this metric to declare stagflation, which will take five to six months, and much can change in that time, especially regarding inflation, the second critical component for the stagflation narrative.

The Price Index within the GDP print is stale. We have already observed inflationary pressures on the horizon, with CPI and Producer Price Index (PPI) providing clear indications that 1Q’s PCE metric would come in hotter than the previous quarter. The monthly inflationary measures are more influential on Federal Reserve members than the GDP Price Index due to their frequency and responsiveness to input prices.

Is stagflation a possibility? Certainly, anything is possible. However, commodity base effects will likely be favorable for the Fed during the late summer months for a brief period, which may provide some breathing room. Any relief from the reflationary narrative, even temporarily, may reset the timeline for declaring stagflation, pushing the appropriate time to declare deflation into early next year.

Stagflation is not a favorable environment by any means and is a rare occurrence in the United States, highlighted by the unique economic dynamics experienced between the mid-to-late 1970s and the Federal Reserve's missteps in the early 1980s. We are not close to that scenario at the moment. Inflation is a near-term concern, but if the labor market begins to deteriorate, we may face a more significant problem. Something to keep your eye on.

Nasdaq-100 futures are down more than -1% in early trading, weighed down by a negative earnings move in Facebook and Instagram’s parent company Meta Platforms (META). The social media juggernaut was down more than -19% at one point in yesterday’s postmarket session, but losses have pared back somewhat. Even though Meta beat on earnings and revenue, shares moved lower because revenue guidance disappointed Wall Street.

The /NQ contract has struggled in recent weeks and was down about -6.5% from the all-time highs as of yesterday’s close. Price initially rose yesterday after two days of gains but failed to take out the 63-day Exponential Moving Average and collapsed shortly after the open. Price is below the 63-day EMA and other commonly followed moving averages, such as the 21-day EMA and the 50-day Simple Moving Average, and these lines additionally are now sloping downward. This is an important sign of potential trend shift. Momentum also is in the hands of the bears according to the Relative Strength Index (RSI). This indicator has been trending down and making lower highs since December even as price continued to rise and is now below the 50 midline. It briefly crossed below the oversold area, but price recovered and crossed back out the next day.

If price keeps moving lower, look to the recent lows from April 19 around 17,113, which roughly line up with the old highs from December. Beyond that, the yearly Volume Profile shows a node around 16,885, so this could be another area to look for support. In terms of resistance, the 63-day and 21-day EMAs are fairly close together and provide an upside zone to watch between about 17,800 and 17,867. After that, the old supportive lows around 18,063 are now resistance to watch.