Originally published on May 1, 2019
By Ansh Chaudhary
The Federal Reserve ends its two-day meeting today. Chairman Jerome Powell will be discussing the economic outlook at a press conference scheduled for 2:30 p.m. (ET). As expected, the Fed won't be changing interest rates at this time. With President Trump demanding more rate cuts ahead of elections, the Fed will likely attempt to stress its independence and not sound too dovish.
Economic data at this point is sending a lot of mixed signals. In some places, there are signs that a more dovish policy from the Fed would be appropriate, while in others a more hawkish approach seems more suitable. Typically, the Fed increases interest rates when the equity market is strong and inflation is high and lowers rates when economic data starts to show signs of weakness.
Equity markets are posting record highs. The S&P 500 has had its best start to the year in 32 years, according to CNBC. The index has rallied nearly 18% now and has the momentum to break out past the 2,940 resistance level. This strong economic data is further supported by Friday's release of the GDP growth rate.
The real GDP growth rate came in at 3.2% for the first quarter, according to Bloomberg. Although GDP growth is generally a good thing, it is important to consider the factors driving this growth. Bloomberg mentions the rate in Q1 was boosted by exports and an increase in inventories. Exports are typically a volatile sector, and an increase in inventories suggests slowing demand or a late-stage business cycle.
Another puzzling factor for the Fed to consider is weakening inflation. The Fed's target for inflation is about 2% a year. The core inflation measure rose 1.6% in March from a year earlier, decreasing from 1.8% in January, reports The Wall Street Journal. In times of inflationary pressures, the Fed typically increases interest rates to counter the effect.
Equity markets and GDP numbers point toward a strong economy, but a closer look at what's pushing GDP growth higher shows a different picture. On top of that, weakening inflation provides an even blurrier image on the economic outlook. The Fed's patient approach has investors awaiting their next move.
Sectors: The average momentum score for the Sector Benchmark ETFs decreased from 23.27 to 23.18. Momentum increased for five of the 11 sectors last week. Health Care's score, which jumped 15 points, increased the most, but it remained in last place. Technology remained the top sector, while Telecommunications overtook Discretionary for second place.
Factors: Among the Factor Benchmark ETFs, the average factor score increased from 24.50 to 24.92. Momentum increased for only four of 12 factors last week. The score for Momentum, which gained 9 points, increased the most. High Beta and Quality remain in the top two spots. Small Size fell to last place after Momentum's increase in rank.
Global: The average Global Benchmark ETF momentum score decreased from 21.73 to 17.64 for the week. Momentum in the global sector decreased in all but two sectors, Japan and the USA. Japan's score remained unchanged from the previous week, while USA's 1-point increase moved it from third place to first. Japan and Latin America remained the two laggards.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.