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NewsTranscript
00:00 A surprisingly weak first quarter economic report is rattling Wall Street this morning
00:08 with the U.S. GDP having grown just 1.6 percent instead of the 2.5 percent forecasters had
00:15 been expecting.
00:16 Meanwhile, inflation as measured by personal consumption expenditures came in at 3.7 percent,
00:23 excluding food and energy, hotter than the 3.4 percent forecast.
00:29 I'm Rosemary Miller, and here to discuss the report with us today is Yongyu Ma, the
00:33 chief investment officer of BMO Wealth Management.
00:37 Thank you so much for joining me today, Yongyu.
00:39 Great to be here.
00:40 Thank you.
00:41 So is this report really as bad as it looks?
00:44 It seems like consumers are still spending, but international trade and reduced inventory
00:49 growth subtracted from the number.
00:51 What can you tell us?
00:52 Yeah, if you look under the hood of the GDP report, it's actually quite healthy.
00:57 You did have consumer spending hold up well.
00:59 You had business spending hold up well also.
01:02 And those areas that detracted from GDP growth inventories and trade, those tend to be quite
01:08 volatile.
01:09 So on a quarter to quarter basis, sometimes those add a lot or contribute a lot.
01:13 Those tend to wash out over the course of a year.
01:16 So really, when we look at what we think are going to be the drivers going forward, it's
01:21 the business spending and consumer spending that have held up well.
01:24 We think they'll continue to hold up well throughout the rest of the year.
01:27 So we're not too concerned about today's report because some of the underlying fundamentals
01:32 still look pretty good.
01:34 So everybody's wondering what the Federal Reserve's next move on interest rates will
01:37 be.
01:38 What does the hot inflation number today mean for the outlook for rate cuts this year?
01:43 The Fed is going to be on hold for a while.
01:45 I think there's a lot of skepticism among Fed members about if interest rate cuts are
01:53 even necessary at all this year.
01:55 So I think we're going to need to see a string of inflation data for multiple months before
02:01 the Fed would get comfortable with the idea of cutting rates.
02:04 So I think these higher rates we've had recently are with us for some time to stay.
02:10 Perhaps we'll get one interest rate cut this year, but I think that's probably the most
02:14 we would get.
02:15 So when do you think that one interest rate cut will be?
02:19 We get it would probably be either September or December.
02:24 But again, I think we're going to need a string of favorable inflation data before the Fed
02:29 is comfortable.
02:30 So that favorable inflation data would have to start pretty soon here, if not next month,
02:35 certainly by the summer, because it's not going to be just one or two months of good
02:39 data that gives the Fed confidence.
02:41 It's going to be probably three or four months.
02:43 So it'd have to start soon if we're going to get a rate cut in September.
02:47 Otherwise it would probably be pushed off until either December or even 2025.
02:51 Well, Young, it looks like consumer spending is still strong and initial unemployment claims
02:56 in the in the latest week were lower than expected.
03:00 What do you see there?
03:01 The labor market continues to be healthy.
03:04 That's been a bedrock of the economy and what's provided stability and allowed us to have
03:10 the soft landing.
03:11 And we see that in the initial unemployment claims that are really at rock bottom levels
03:15 right now.
03:16 So we think the labor market will continue to be healthy.
03:18 That will continue to support consumer spending.
03:21 We have modest wage growth that is above inflation.
03:25 Even with even with the higher inflation prints we've had, wage growth is still running around
03:30 that same level.
03:31 So we think the consumer will hold up fine here and will help us to actually achieve
03:37 what we think in the second half of the year will be accelerating growth based on corporate
03:42 spending improving.
03:43 So we see the fundamentals still holding in there and consumers being a foundation of
03:49 that.
03:50 So were there any other bright spots that you saw in this report?
03:54 I don't know about bright spots.
03:56 I think the main thing about the report is that there weren't areas of concern.
04:00 And perhaps one thing we could point to is business spending in the GDP report that held
04:06 up quite well.
04:07 We do think that over the past year, businesses have been relatively cautious in terms of
04:12 their spending because they've been concerned about a recession or an economic slowdown.
04:18 And now that that has not materialized, I think the businesses are starting to shift
04:21 to expansion mode and that spending should really start to accelerate in the coming quarters.
04:27 So it's not necessarily a bright spot in this report, but we do think it will be a noticeable
04:33 bright spot in the coming reports later this year.
04:36 Well, the stock and bond markets, they clearly didn't like today's news.
04:41 But how much of that is just a knee jerk reaction?
04:44 There's part of it that's a knee jerk reaction.
04:46 Certainly inflation concerns are prominent now.
04:50 Some of the earnings reports that came out last night were not favorable as well.
04:56 So I think we've had a big run over the past five months and a big run to start this year
05:00 as well.
05:01 And some of what's taken place over the past couple of weeks is really just a pullback
05:05 from that, given that from those big run ups, given that the Fed is now on hold and also
05:11 inflation is not on the downward trajectory that the market was hoping for and anticipating.
05:17 And it looks like it's going to be more of a bumpy path.
05:20 But we do think the path of inflation is still downward throughout the rest of the year.
05:24 It's just not a straight line.
05:26 So I think the market is fine to pull back a bit, but we don't think there's going to
05:32 be a major downturn or an overall shift in the trend.
05:36 We think it's just a pullback from some of the run up that we've had recently.
05:40 How do you think long term investors should react to this data?
05:45 I don't think long term investors should react too much.
05:47 I think if long term investors have their plan that they've laid out and they're comfortable
05:53 their risk profile, we do think that this year is going to still be a favorable one.
05:57 And we don't think that these near term pullbacks are worth repositioning the portfolio for.
06:04 If there were a greater pullback in the economic fundamentals and trajectory and outlook remain
06:09 healthy as we think it will, that could be an actual opportunity to deploy more capital.
06:15 We think now is probably stay the course and see how some of the near term develops.
06:19 But there could be opportunities that arise if this pullback does actually go a bit further.
06:23 Well, Young, is there anything else on your radar regarding today's GDP report that you
06:28 believe should be on ours?
06:31 I think that covers it.
06:32 I wouldn't put too much emphasis on one quarter's GDP report.
06:36 It is a backward looking data point.
06:39 And when we look at some of the forward looking measures, both including the labor force,
06:44 such as the initial unemployment claims, or if we look at other measures of CEO confidence
06:50 and expected expenditures in the economy, we do think that those continue to look favorable.
06:55 So even though today's report was on the weak side, we think that the coming data and the
07:00 coming growth trajectory for the U.S. economy is actually quite healthy.
07:03 Well, thank you so much for joining me today.
07:05 Thank you.
07:06 Thank you.
07:06 [END]