How Wall Street reacts to the GDP data will be telling

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New York

Wall Street analysts are holding their breath and crossing their fingers this morning as they await gross domestic product numbers for the final quarter of 2022.

Traders have recently been celebrating dismal economic news in the hopes that it will prompt the Federal Reserve to pivot away from rate hikes and maybe even provide some stimulus to boost corporate coffers. But that could all change if a recession looms into view and the US debt ceiling standoff drags on.

What’s happening: Fourth-quarter US GDP numbers are due out at 8:30 a.m. ET Thursday and they’re expected to show a healthy economy with a 2.6% annual growth rate. While that would be a moderation from the third quarter’s 3.2% growth, it’s not a sign of an economy on the brink of recession.

Economists will also get their first peak at annual GDP growth for 2022, which will likely slow significantly from 2021’s very strong 5.9%, which was the best performance since 1984.

Investors are hoping for a Goldilocks “not too hot, not too cold” number that reassures the pessimists that a soft-landing for the economy is still possible but that also convinces the Fed that their inflation-fighting rate hikes have worked well enough to consider a pause.

Wall Street reacts: “One of the more perverse realities to remind clients about is that financial markets and the economy operate on different dimensions, periodically disagreeing about what is good or bad,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management in a recent note.

“Whether Wall Street and Main Street align often depends on where we are in the business and market cycles, the extent to which they’ve gotten out of sync and the prevailing narrative that markets are discounting,” she continued.

The first GDP report of the year, and the Fed meeting next week, are coming on the heels of one of the worst bear markets and some of the largest interest rate hikes in decades. A growing chorus of CEOs are warning of a recession.

The bottom line: Shalett has some advice for investors: “Best to lose the obsession with the Fed, and focus on fundamentals,” she wrote. Good news should be good news and bad news should be bad news.

Quincy Krosby, chief global strategist for LPL Financial, thinks that investors are already following that guidance. Equity markets, she wrote in a recent note, “have apparently begun to interpret data with a more realistic perspective.” Weak data, she noted, “is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike.”

Goldman Sachs issues a stark debt-ceiling warning

A full-blown debt ceiling crisis has the potential to stop the US economy in its tracks, the top economist at Goldman Sachs told my colleague Matt Egan.

“If there were any doubt about the US government’s ability or willingness to make interest and principal payments on time, that could have very, very adverse consequences,” Jan Hatzius, the chief economist at Goldman Sachs, told CNN in an interview.

If Congress fails to lift the debt ceiling in time, Hatzius said investors will worry there is a chance of a missed payment on US Treasuries — which are “maybe the most important asset in the global economy.”

Asked if a default or even a near default could cause a recession, Hatzius said yes.

“That is the worry: That you get turmoil in financial markets, a big tightening in financial conditions and that adds to downward pressure on economic activity,” he said. “That is certainly the worry. It’s not our expectation.”

The United States hit the debt ceiling last week, forcing Treasury Secretary Janet Yellen to make accounting maneuvers to avoid breaching that $31 trillion borrowing limit.

McDonald’s and Chipotle are spending millions to block raises for their workers

Chipotle, Starbucks, Chick-fil-A, McDonald’s, In-N-Out Burger and KFC-owner Yum! Brands have donated millions of dollars to help oppose a law in California that will lift minimum wages in the state up to $22 an hour for fast food employees, reports my colleague Nathaniel Meyersohn. The minimum wage for the non-fast food workers would remain at $15.50.

Advocates of the law see it as a breakthrough in improving pay and conditions for fast-food workers.

Opponents say it’s a radical measure that would have damaging effects. They argue it unfairly targets the fast-food industry and will increase prices and force businesses to lay off workers. On Wednesday, McDonald’s US President Joe Erlinger blasted the law as one driven by struggling unions that would lead to “an unelected council of political insiders, not local business owners and their teams,” making key business decisions.

Proponents and critics of the closely watched initiative both say that it could transform the fast-food industry in California and serve as a bellwether for similar policies in other parts of the country.