Author丨Wu Bin
Editor丨Zhang Mingxin
Source丨Xinhua News Agency
The Fed's "last mile" to fight inflation is particularly difficult!
On the evening of April 26, the United States released the core PCE data for March, which has remained unchanged for two consecutive months, but the increase exceeded expectations. The persistently hot inflation report has weakened investors' expectations for the Federal Reserve to cut interest rates this year, and the Fed is expected to keep rates unchanged next week.
The core PCE price index in the United States recorded an annual rate of 2.8% in March, higher than market expectations (2.7%) and remained unchanged for two consecutive months
On the evening of April 25, the United States also released the first-quarter GDP and the first-quarter core PCE price index. After the release of the data, the Fed's interest rate cut expectations took another hit.
CME Group's Fed Watch tool shows that the probability of the Fed cutting rates for the first time has dropped across the board, with less than a 10% chance of a rate cut in June and around 50% in September, and the Fed may only cut rates once in the fourth quarter of this year.
The US GDP report sends a dangerous "stagflationary" signal
On April 25, local time, data released by the U.S. Department of Commerce showed that the preliminary annual rate of GDP growth in the first quarter was 1.6%, the slowest growth rate since the second quarter of 2022. But the core personal consumption expenditures (PCE) price index surged 3.7% in the first quarter, the biggest increase in nearly a year.
Photo source/Wind
Source/Bloomberg
The United States once "killed stocks and bonds"
After the release of two important data in the United States on the evening of the 25th, the U.S. market suffered a "double kill of stocks and bonds".
The three major U.S. stock indexes fell across the board on April 25, with the Dow down 0.98% at 38,085.66, the Nasdaq down 0.64% at 15,611.76, and the S&P 500 down 0.46% at 5,048.44.
U.S. Treasuries have also suffered another sell-off, and yields of all maturities have hit new highs for the year. At the end of the New York session on April 25, the 2-year Treasury yield rose 7.1 basis points to 5.006%, the 5-year Treasury yield rose 6 basis points to 4.722%, the 10-year Treasury yield rose 6.1 basis points to 4.707%, and the 30-year Treasury yield rose 4 basis points to 4.814%.
On the evening of April 26, the three major U.S. stock indexes collectively opened higher, with the Dow up 0.31%, the S&P 500 up 0.75%, and the Nasdaq up 1.39% as of press time
The U.S. economy has slowed
After a series of strong data, the U.S. economy is showing signs of slowing.
Specifically, US real GDP grew at an annualized rate of 1.6% quarter-on-quarter in the first quarter of 2024, the lowest since the first quarter of 2023, 0.9 percentage points lower than the market expectation of 2.5%, and as high as 3.4% in the fourth quarter of 2023.
Wang Youxin, a senior researcher at the Bank of China Research Institute, told the 21st Century Business Herald reporter that from the first quarter of the economic and inflation data, the U.S. economy is not as good as imagined, the problems and vulnerabilities in economic operation are gradually emerging, and the effect of interest rate hikes on curbing inflation has declined, but the negative impact on economic growth has gradually increased.
Overall, the U.S. economy has slowed, but the risk of "stagnation" is relatively low. Ryan Sweet, chief economist of the Oxford Institute of Economics, told the 21st Century Business Herald reporter that the U.S. GDP fluctuates greatly and may be revised sharply in the future, so there is no need to worry too much about the lower-than-expected growth in the first quarter.
In Sweet's view, the deceleration in GDP growth will not particularly worry the Fed, as the details are better than the title suggests. Taken together, inventories and trade dragged down Q1 GDP more than expected, with inventories being one of the most volatile components of GDP.
GDP in the first quarter was better than it seems, the steady growth in consumption suggests that the economy is still growing slowly, and the other hard data on the economy is strong, with low unemployment, a solid job growth trend, and a rebound in industrial production.
In terms of trade, the net export of goods and services in the United States in the first quarter dragged down GDP growth by 0.9 percentage points, compared with the previous value of 0.3 percentage points, affected by the rising trade deficit in goods and services. The U.S. trade deficit rose to $68.9 billion in February, up from $67.6 billion in January.
The US dollar has soared by 18% in 3 years, how big is the impact of a strong dollar?
Behind this, a strong dollar is causing more and more U.S. consumption to shift to imports, while U.S. domestic exports barely grow. The broad dollar exchange rate index has risen more than 4% so far this year, and the dollar has surged by 18% compared to 2021.
The trend of the U.S. dollar index in the past 3 years Source/Wind
Steven Blitz, chief U.S. economist at TS Lombard, pointed out that the problem is a strong dollar, which is shifting the procurement of capital equipment from domestic U.S. manufacturers to foreign producers, which runs counter to the efforts of government policy.
The drag on economic growth from imports and inventories is similar to that at the beginning of 2022, but both elements of GDP are volatile. For example, a weak inventory in one quarter tends to drive a later period of strength, with businesses selling goods first and then replenishing inventory.
Oren Klachkin, market economist at Nationwide Financial, said there was reason to think the 1.6% growth rate in the first quarter exaggerated the extent of the economy's weakness and that the huge drag on imports and inventories was unlikely to last this year.
Officially, U.S. Treasury Secretary Janet Yellen said that economic growth in the first quarter could be revised upwards and inflation would slow to more normal levels.
She was most concerned about the strong performance of consumer spending and investment spending, two final demand factors that were broadly in line with last year's growth rate.
Expectations of interest rate cuts have been hit hard again
After the previous CPI data, the PCE price index also released a red flag.
The U.S. PCE price index in the first quarter was 3.4% annualized quarter-on-quarter, and the core PCE price index, which excludes food and energy prices, rose 3.7% quarter-on-quarter, the highest since the second quarter of 2023, exceeding market expectations of 3.4%, a significant rebound from the fourth quarter of last year.
The growth of the core PCE price index may panic the Fed a bit. The core PCE price index rose at an annual rate of 3.7% in the first quarter, almost double the previous two quarters and higher than consensus expectations, Sweet said. The recent strength in inflation will keep interest rates elevated for longer, and with the recent push to push back our forecast for the Fed's first rate cut from June to September, and the magnitude of the rate cut from 75 basis points to 50 basis points this year, the risk tends to diminish further.
The Fed's "last mile" to fight inflation is full of obstacles, and the road ahead is still bumpy. Wang Youxin told reporters that the stickiness of inflation in the United States lies not only in the good performance of the U.S. labor market, but also in the rebound of energy prices, housing and other service prices continue to be high.
Economic growth is below the long-term trend and inflation is climbing rapidly, leaving the Fed in a dilemma if this trend continues.
Olu Sonola, head of U.S. economic research at Fitch, said that hot inflation is the really important message in the GDP report, and if economic growth continues to decelerate slowly, but inflation goes in the wrong direction, the Fed's hopes of cutting interest rates in 2024 will start to become increasingly elusive.
Wang Youxin told reporters that the current U.S. economy is still showing some resilience and is in a state of moderate growth, but from the trend of CPI and PCE indicators, the performance of the U.S. job market, and the trend of energy and service prices, the rebound pressure of inflation cannot be ignored.
High inflation means that the Fed will keep interest rates high for longer, which could eventually hit the economy further. Wang Youxin said that the current risk of "expansion" may be more prominent than the risk of "stagnation", but this does not mean that the risk of "stagnation" can be ignored. If interest rates remain high and private consumption continues to fall, downward pressure on the U.S. economy will also increase. The change in interest rate cut expectations also reflects the comprehensive changes in the U.S. economy, employment, inflation and other data, and when one or several data are less than expected, it will lead to the market adjusting the Fed's policy expectations, which undoubtedly increases the difficulty of policy formulation.
High interest rates and a weakening economy are also not good news for the market, as U.S. stocks have pulled back sharply recently and U.S. Treasuries have also suffered a sell-off. James St. Aubin, chief investment officer of Sierra Mutual Funds, said that the first-quarter GDP data of the United States undoubtedly broke the stock market's obsession with high growth, and without high growth, corporate earnings may be lower than expected.
Whether the "austerity trade" will continue in the future is still in question. Wang Youxin told reporters that the "double kill of stocks and bonds" reflects the market's concerns about the future Fed's policy formulation and economic conditions, and whether the "tightening trade" can continue depends on the trend of future economic data. In the current economic environment, any wind and grass can trigger violent fluctuations in the market, and the economy is a complex and volatile system that requires continuous learning and adaptation to the new economic environment.
SFC
This issue is edited by Jiang Peipei
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