Economic growth unexpectedly “exploded,” and core inflation was stubborn. After the data was released, traders expected that the Fed's first interest rate cut would be postponed until December, and that the Fed would only cut interest rates by about 35 basis points for the whole of 2024, far lower than the forecast at the beginning of the year.
Inflation rose sharply, consumer and government spending cooled, and the US economy slowed sharply in the first quarter, the lowest level of growth in nearly two years.
On Thursday, data released by the US Department of Commerce showed that the annualized quarterly growth of US GDP in the first quarter was 1.6% month-on-quarter, far short of market expectations of 2.5%, and a sharp slowdown from 3.4% in the fourth quarter of last year.
Meanwhile, the GDP weighted price index for the first quarter was 3.1%, higher than the forecast of 3.0%, almost double that of 1.6% in the fourth quarter.
In terms of quarterly inflation data released at the same time, personal consumption expenditure (PCE) annualized quarterly increased by 2.5% compared to the initial value of 3.3%, and fell short of the expected 3%; the core PCE price index excluding food and energy grew 3.7% quarterly, exceeding expectations by 3.4%, almost double the previous value of 2%, for the first time in a year. It shows that core inflation remains stubborn.
After the GDP data for the first quarter was released, the three major US stock indices fell, and the yield on US 10-year treasury bonds rose by about 4 bps in the short term to 4.694%. The US dollar index rose by nearly 20 points in the short term to 105.82.
Consumer spending is slowing, and inflation in the service sector is stubborn. Is stagflation coming?
As an important pillar of the economy, consumer spending increased by 2.5% in the first quarter, lower than the 3.3% increase in the fourth quarter of last year, and lower than the 3.0% forecast.
Spending patterns also changed during the quarter, with commodity spending falling 0.4%, largely due to a 1.2% drop in purchases of bulky durable goods and a 4% increase in service spending, the highest quarterly level since the third quarter of 2021.
Inflation rebounded sharply in the first quarter. Excluding housing and energy, inflation in the service sector rose 5.1%, almost double the growth rate of the previous quarter. The March PCE Index, consumer spending and revenue data will be released on Friday.
Since inflation began to soar, consumers have generally kept up with the pace of inflation. Rising inflation has eroded wage growth, and the personal savings rate fell to 3.6% in the first quarter from 4% in the fourth quarter. Revenue, adjusted for taxes and inflation, increased by 1.1% over the same period, to less than 2%.
Fixed investment and government spending at the state and local levels helped keep GDP positive this quarter, while the decline in private inventory investment and the increase in imports had a negative impact.
It is worth mentioning that residential investment surged 13.9%, the biggest increase since the fourth quarter of 2020, mainly driven by broker commissions and other ownership transfer costs and new single-family housing construction, which may be a positive sign for the real estate market.
However, changes in private inventories had a negative impact on GDP for the second consecutive quarter, contributing -0.35% to GDP, a slight improvement from -0.47% in the fourth quarter.
How are interest rate cuts expected to go?
After the data was released, the swap market is no longer fully priced and the Federal Reserve will cut interest rates by December. Furthermore, traders expect the Federal Reserve's first rate cut to be postponed until December. Interest rate swap traders now expect that the Federal Reserve will only cut interest rates by about 35 basis points for the full year of 2024, far lower than the forecast at the beginning of the year. At that time, it was expected to cut interest rates by 25 basis points more than six times this year.
At the time the report was released, the market was nervous about the state of monetary policy and when the Federal Reserve would start cutting interest rates. As inflation remains high, investors have to adjust their views on when the Federal Reserve will begin easing. Earlier expectations of interest rate cuts indicated that interest rate cuts will begin in September, and the Federal Reserve will probably only cut interest rates once or twice this year.
Jeffrey Roach, chief economist at LPL Financial, stated:
The economy is likely to slow further in the next few quarters as consumer enthusiasm is likely to come to an end. Furthermore, as inflation continues to put more pressure on consumers, the savings rate is falling. We should expect inflation to ease somewhat this year as aggregate demand slows, but the Fed's 2% target is still far away.
Analyst Paul Davidson said:
At the beginning of this year, the economy slowed more than expected as weak corporate inventories and exports offset strong consumer spending and a boom in housing construction. The US Department of Commerce announced a 1.6% GDP growth for the first quarter, lower than the strong 4.1% increase in the second half of last year, and lower than market expectations.
The disappointing economic performance in the first quarter is likely to soften the views of Federal Reserve officials. Earlier, due to the accelerated rise in the consumer price index in the first quarter, Federal Reserve officials said they were not in a hurry to cut interest rates. However, some analysts still believe that the economy will weaken significantly later this year, while inflation will resume a rapid decline, thus enabling the Federal Reserve to cut interest rates several times.
The Federal Reserve will meet next week and is expected to keep interest rates at a 20-year high. Traders will analyze Federal Reserve Chairman Powell's remarks to find the latest clues about the easing policy.