April 21, 2017
First quarter GDP expectations continue to drift lower as economic releases indicate the U.S. economy softened at the beginning of the year. The Atlanta Fed has an econometric model they update as economic statistics are released. That model suggests the economy grew a negligible 0.45% in the first quarter. There are also a number of indexes we track that examine economic surprises and have some predictive value for future economic releases. These surprise indexes point toward continuing weakness into the current quarter. Despite the tepid beginning to 2017, the Fed appears to be committed to at least two more rate hikes this year. Fed officials speaking at public events have been consistent and firm in their intention to raise rates. It would be difficult for them to reverse course without eroding credibility. Investors remain skeptical as “Fed funds” futures suggest that there is only one more increase likely in 2017. The Fed has a history of not delivering on rate hikes due to economic weakness and financial market instability. We expect them to deliver on at least another hike given the recent resilience of the financial markets and better economic strength in Europe. In the meantime, the markets will be focused on the French election this weekend that could spark some near-term volatility.