The release of US GDP data this week is featured in this week's financial news update, which will be looked into at the upcoming FOMC meeting in light of the likely oncoming recession. Furthermore, news of First Bank's liquidity trouble has caused its shares to plunge by more than 50% this week. On the bright side, Meta stock's Q1 earnings were stronger than predicted, resulting in a 14% increase in its stock.
US GDP Q1 remains positive, but there is a risk of negative growth ahead
The GDP report for Q1 2023 had no positive surprises, despite the fact that the Q1 number was still in positive territory. The quarterly GDP fell from 3.2% in 2022 Q3 to 2.6% in 2022 Q4, then to 1.1% in 2023 Q1.
It is vital to emphasize, however, that a recession is defined as two consecutive quarters of negative GDP. So, we can conclude that the US economy is currently on the verge of entering a recession.
Given the possibility of a poor Q2 report, the US GDP is projected to have a higher impact and may even result in a negative result. That is when people and institutions are likely to start paying attention to the data.
A recession is expected to come in the midst of the year
The US economy struggled in 2023 Q1 due to higher interest rates, notably in the housing and business sectors, but the government has spent more to keep the economic wheel turning.
On a positive note, Americans are continuing to spend money because of the large number of available jobs and increased salaries, resulting in higher-than-expected earnings for credit card companies. MasterCard earned $5.75 billion, 1.94% more than predicted; Hilton earned $2.29 billion, 4.79% more than expected; and Chipotle earned $2.37 billion, 1.24% more than expected.
However, experts are not overly bullish; here is what they forecast for the US economy:
- The Conference Board's index expects a mid-year recession. They predict that the unemployment rate will be 4.5% by December, implying that almost 1 million Americans will lose their jobs in the next seven months.
- According to the Fed's most recent economic estimates, a recession will begin at the end of this year.
- The IMF forecasts strong worldwide economic growth this year, but the United States will lag behind at 1.6%. They do, however, warn of potential risks, including slower-than-expected inflation, problems with China's openness, the ongoing Russia-Ukraine crisis, and financial instability, as shown by Credit Suisse and Silicon Valley Bank.
In short, the economic forecast for this year is bleak, with a US recession on the horizon.
2023 May FOMC meeting next week: is this the final rate hike?
The FOMC will happen next week (May 2-3). Investors anticipate that this will be the final rate hike of the cycle, with a 25 basis point increase.
So far, the Fed's watchlist metrics have been mixed. While housing prices have improved in certain locations, core inflation remains a worry. As a result, it's unclear if the Fed will suspend rate hikes at this meeting.
Is the recession here already?
In order for the economy to enter a recession, the Fed must see a decline in PMIs and labor market statistics, a slowdown in job creation, or an increase in job losses in the United States, as well as an increase in jobless claims.
However, none of these indicators have yet reached recessionary levels.
The Fed anticipates that house prices will peak by the summer, but they will need to see more progress in non-housing core inflation, such as a reduction in wage pressures, before calling their inflation issue The Fed will also constantly watch how its policy decisions influence the real economy, and they may act against the priced-in expectation of rate cuts that investors anticipate that the Fed will need to loosen its policy in response to a recession.
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First Bank stock plunged over 50% during the week
First Republic Bank is experiencing financial troubles and may be on the brink of collapse. Shares of the bank plunged over 30% on Wednesday after falling 49% the day before due to an excess of uninsured deposits and losses on bonds and treasuries, similar to Silver Valley Bank (SVB) and Signature Bank.
The White House announced on April 28 that it is monitoring the situation at First Republic and may intervene if required.
What happened with the First Bank?
Following a string of bank failures in March, overall deposits at First Republic plunged 41% in the first quarter. Fortunately, after a $30 billion liquidity infusion from a consortium of banks at the end of March, deposits have steadied. However, the cash injection could not prevent the bank's net interest income from falling by 19.4% year on year, and it remains vulnerable to liquidity issues due to a high loan and long-term investment to deposit ratio of 111%.
Possible outcomes for First Bank
In the current scenario, the bank is still open for business. Here are some possible outcomes:
- It's possible that the First Republic will carry on as is, although this is doubtful.
- The bank may try to sell some of its assets to buyers in exchange for a preferred stock stake in the company. However, this is a difficult alternative because the assets (bonds) are likely to sell for much less than market value.
- The worst-case scenario is that the bank is placed under receivership, which means that a regulatory authority or government agency takes control of the bank and its assets. In this event, First Republic investors would very certainly lose money.
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Meta stock jumps on Q1 earnings, indicating interest in AI adoption
Meta's stock rose 14% today after the firm reported first-quarter profits that exceeded expectations while also raising its prediction for the current quarter and lowering its expense outlook.
Meta is not abandoning the metaverse
During yesterday's earnings call, Meta CEO Mark Zuckerberg spoke about "a year of efficiency," emphasizing the company's continued focus on AI and the metaverse. Despite rumors, Meta is still devoted to the metaverse, as demonstrated by the call's constant reference to AI.
Positive Outlook for Meta
Analysts at Morgan Stanley and JP Morgan raised their Meta price expectations by 25-27% to $300 and $305, respectively. The CFO outlined the planned 1.1% to 2% increase in staff in 2024, with hires focusing on generative AI, infrastructure, and Reality Labs.
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