Let's get to the big story.
Breakdown.
The Federal Reserve is officially in uncharted territory.
The central bank left rates unchanged, but the FOMC is divided a historic 4 descents at the April policy meeting.
Meanwhile, Jerome Powell breaking a 75 year precedent by staying on the board and also sparking tensions with the Treasury Department.
You know the macro picture here in.
The US is fracturing Q1 GDP just missed expectations as the oil shock weighs on the US consumer.
But at the same time, businesses are pouring billions into AI spending.
Well joining me on this Friday morning to weigh in as we kick off a new trading month is Brian Jacobsen, Chief Economic Strategist at Annex Wealth Management.
Good morning and happy Friday to you, Brian.
Thank you so much.
For joining us, so the April Federal Reserve meeting reflecting the most dissent since 1992.3 FC members flatly rejected and easing bias between the energy shock as well as lingering tariffs.
So what did you make of some of the comments out from Jay Powell and were you surprised at the outcome of the FOC meeting.
Yeah, thanks for having me.
I don't think I should have been as surprised as what I was by the outcome, especially if I step back and look at when was the last time that we had that many dissents, and as you pointed out, it was 1992.
We also had that number of dissents in 1990.
Now what happened back then, 1990, we had the Gulf War, oil price shock.
The Fed really didn't know what to do.
There was some disagreement about, you know, should they react to the inflationary pressures of higher, higher oil prices.
Or should they react in the opposite direction to the possibility of the growth slowdown.
So they started cutting rates.
By 1992, the question was, were they in the clear?
And I think we're in a similar situation today.
They're having this disagreement.
They know that really economics would suggest you look through these oil price shocks because it has actually a longer term growth dampening effect than it does have as far as supporting inflation, but They want to maintain their credibility.
They want people to make sure, or they want to make sure that people's expectations aren't that inflation is going to stay entrenched.
So I think that is some of the, almost like almost the jawboning that they're doing is they're going to talk about having two-sided risks, possibility of hiking, but when push comes to shove, they'd actually prefer to cut in this environment.
So I think that was probably the most surprising thing.
But I probably shouldn't have been surprised. and Brian, I think context is here very key here because we like to look back in history and make comparisons, but I think looking at the economic data is key as well.
The Fed's preferred PC gauge just surged to 3.5%, and that is the highest rate in nearly three years.
So with monthly inflation also accelerating on the back of fast rising gas prices, what does this energy shock actually mean for Americans right now?
Yeah, it really does mean that it's a continuation and an extension of that K-shaped economy where you have higher income individuals driving most of the consumer spending.
They are a little bit quite a bit more resilient to high gasoline prices relative to lower income individuals, and I think we're seeing that in the consumption expenditure data and retail sales where You know, just for perspective, gasoline sales were up 21% from a year ago, and that was all a price effect.
In fact, the volume was down a little bit just because of how much the price has gone up.
The ones who are really, I think, being squeezed by this, lower income individuals, so they're eating out less, going to convenience store a little bit less.
Trying to crimp and save where they can.
So, it's a continuation of this K-shaped economy, and that's where this becomes a very political issue and it has been in terms of, you know, voters do not like these high gasoline prices, whether you're high-income or low income, but the low-income individuals are the ones who are really, uh, feeling the brunt of these high prices. and as you mentioned, it is midterm election year and we are seeing this brutal squeeze on Main Street.
We got first quarter GDP yesterday that did miss estimates slightly by about 0.2%.
But how close would you say the US consumer is to a breaking point right now?
Yeah, some people already are at that breaking point, right?
Lower income individuals, higher income, I think they're going to be just fine.
The economy as a whole from a consumption standpoint, I think it's going to be slower growth, but not necessarily recessionary conditions.
With those GDP numbers, 2% annualized growth is a decent number.
It's not great.
It missed expectations, but half a percentage point of that came from businesses spending on computers. and information technology.
Another 0.5% point of that came from consumers spending more on health care.
So it's this mix where the headline looks like, oh, that's OK, but when you dig into it, it's like, well, it's driven by boardroom decisions as far as investment in technology, and then almost like the waiting room and perhaps emergency room decisions as far as health care spending, and that's not a fantastic mix.
Yeah, and as you mentioned, we are in the thick of earnings season.
We heard from some of the hyper scalers, the mag 7 names, but this morning we also heard from some of the energy companies in particular Chevron as well as Exxon.
So how do corporate profit margins actually survive in this current environment when input costs, as well as supply chain tensions are soaring but and demand may be slowly cratering.
Yeah, that is the key, and I think that's one of the reasons why we have to actually dig in more into the company-specific analysis and not just the, the, you know, sector or industry analysis because we have had this rising tide of margins, which now it's going to become much more challenged for some companies more than others.
And I think that explains some of the stock market response to the earnings releases.
From the tech companies that have released, right?
We heard about how Meta and Apple both, both were talking about rising costs.
And so, if you think about it, what that means is that for every, you know, $100 billion that they spend on data center or AI, it's not buying you as much as what it did a year ago because the cost of that has gone up so much.
And there are some companies that have decided, like Apple, that they Going to focus more on let's do hardware and do the share buybacks.
Others, they decided let's pause or cut back on those share buybacks and continue in what has become apparently an arms race in order to see who can be the first or the best to really have the best model.
And it's a very fascinating environment as far as this bifurcation that's taking place within each sector, especially in technology.
Well, Brian, a lot of moving parts there.
So thank you so much for joining us this morning.
As always, we appreciate your time as well as all of your insights.
Thanks.
Have a great weekend.
