Precursor to Stagflation: Wall Street Stirs Up Another Bloody Storm "New Federal Reserve News Agency" The dream of cutting interest rates has gradually drifted away

Finance Associated Press

2024-04-26 09:43Published on the official account of Cailianshe under Shanghai Poster Industry Group

Finance Associated Press, April 26 (edited by Xiaoxiang) The latest data released by the U.S. Department of Commerce on Thursday brought investors two disappointing news - the U.S. economy grew slower than expected in the latest quarter, and inflation was more stubborn than many investors hoped. This divergence in data towards "stagflation" quickly triggered violent volatility on Wall Street on Thursday, and traders had no choice but to encounter another "stock and bond double kill" trading day.

According to data from the Bureau of Economic Analysis of the U.S. Department of Commerce, real GDP in the United States grew by 1.6% annualized quarter-on-quarter in the first quarter, far less than the market expectation of 2.5%, and a sharp slowdown from 3.4% in the fourth quarter of last year. The surprise in economic growth was sharply lower than expected, mainly reflecting a slowdown in consumption growth and a drag on net exports starting to turn into growth.

At the same time, the preliminary seasonally adjusted month-on-month annualized rate of the core PCE price index in the United States in the first quarter unexpectedly reached 3.7%, higher than the forecast of 3.4%, and far higher than the previous value of 2.0%, which is also the first accelerated climb of the indicator in a year, further highlighting the risk that the Fed may not cut interest rates as quickly as expected at the beginning of the year.

Many industry insiders said that the performance of these two sets of data surprised almost everyone overnight, especially the latter, where people are more anxious about inflation re-accelerating than about a slowdown in economic growth. The higher-than-expected inflation gauge also made Friday's March PCE price index data even more eye-catching than usual.

In fact, a large part of the slowdown in U.S. economic growth comes from volatile categories such as imports and exports, which are likely to rebound in the next quarter, so the rise in inflation is actually the most critical part of Thursday's economic data.

Boris Kovacevic, global market strategist at Convera, said: "The market's reaction to the [GDP] data illustrates what investors are most concerned about – inflation rather than economic growth. Core PCE rose 3.7%, which does hint at a higher March PCE reading tomorrow (Friday). ”

Brett Ryan, senior U.S. economist at Deutsche Bank, also pointed out that "the hardest part for the Fed and markets [on Thursday] is the core PCE inflation data." From the Fed's point of view, it's really a nuisance, and it's the reason why the market reacted quite negatively, because it really puts the Fed in an awkward position, and you start to question whether they can make the planned rate cuts this year. ”

He added that the data could have an impact on the March inflation data, which is scheduled to be released on Friday. The rise in price data for the quarter released on Thursday suggests that either the PCE data for March will be higher than expected, or the revised data will show that inflation in January and February will actually be higher than the previous figures. Neither scenario is conducive to the prospect of a rate cut.

Wall Street once again suffered a "double kill of stocks and bonds"

Looking at the performance of financial markets, U.S. Treasuries came under selling pressure across the board again on Thursday, with yields of all maturities rising to their highest levels of the year, as stubborn signs of inflation in the GDP report led traders to further lower their expectations for the Federal Reserve to cut interest rates.

By the end of the New York session, the 2-year Treasury yield was up 7.1 basis points at 5.006%, the 5-year Treasury yield was up 6 basis points at 4.722%, the 10-year Treasury yield was up 6.1 basis points at 4.707%, and the 30-year Treasury yield was up 4 basis points at 4.814%. George Goncalves, head of U.S. macro strategy at Mitsubishi UFJ Financial Group, said a lot of macro news has been priced in the yield curve.

"Higher inflation and a strong job market outweigh weaker consumption, and the rest of the discussion about stagflation is sure to increase after these data," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a research note.

The three major U.S. stock indexes also fell across the board on Thursday. At the close, the Dow fell 375.26 points, or 0.98%, to 38,085.66, the Nasdaq fell 100.99 points, or 0.64%, to 15,611.76, and the S&P 500 fell 23.19 points, or 0.46%, to 5,048.44. The sharp lower open overnight has brought the Dow and Nasdaq back below their 100-day moving averages.

Among the major sectors in the S&P 500, the communications sector, which was dragged down by Meta, fell the most. Healthcare, real estate, financials, consumer staples and consumer discretionary sectors also fell.

James St. Aubin, chief investment officer at Sierra Mutual Funds, said, "Gross domestic product (GDP) data has undoubtedly shattered the stock market's obsession with high growth, and if there is no high growth, it translates into lower-than-expected earnings." ”

"New Fed News Agency": The dream of interest rate cuts is fading away

Regarding the poor performance of the US economic report card for the first quarter on Thursday, Nick Timiraos, a well-known Fed mouthpiece reporter known as the "new Fed news agency", also published an op-ed with the title of "The Fed's dream of cutting interest rates is fading away" overnight.

Thursday's U.S. economic activity report was the latest wake-up call for investors and Fed policymakers, who had hoped that falling inflation would allow interest rate cuts to begin in earnest this summer, but Thursday's data showed inflation had exceeded expectations for the third month in a row, Timiraos said. So far this year, individual data on economic growth and prices have not been enough on their own to significantly change the Fed's outlook. However, the cumulative effect of these successive disappointing data is significant.

Timiraos cited Chicago Fed President Goolsbee's remarks last week. Goolsbee said at the time that a month's worth of data might be nothing, but "three months" was at least "a real month". After six or seven months of very strong improvement and inflation close to 2%, now we are seeing inflation that is well above that level and we have to readjust.

Timiraos noted that at the beginning of the year, investors in the interest rate futures market had expected six rate cuts this year, but now many expect only one, or no rate cut at all. Bond investors sold off US Treasuries further early Thursday during the New York session, pushing the benchmark 10-year yield above 4.7% for the first time since November — at a time when Fed officials had not even said they had finished raising interest rates.

Timiraos also noted the subtle shift in the stance of Fed officials. Officials, including Fed Chair Jerome Powell, initially downplayed the higher inflation readings in January and February as a "bump" on the road to lower inflation. At a press conference last month, Powell also said the readings "didn't really change the picture."

Recently, however, Powell has acknowledged the limitations of this line of thinking. "I always try to dismiss data that we don't like. So maybe you need to look at yourself and I'll do that," he said. Powell had already hinted last week that stronger inflation in March could delay the timeline for starting interest rate cuts by several months.

For tonight's PCE core price index for March, Timiraos believes that Thursday's report showed that inflation data for January and February is likely to have been revised higher from already firmer levels, with inflation not easing and may have picked up in March, keeping the 12-month inflation rate (YoY) at around 2.8%.

(Finance Associated Press Xiaoxiang)

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