Chief Economist of Guosheng Securities, Director of China Chief Economist Forum, Dr. Xiong Yuan
Macro Analyst of Guosheng Securities, Dr. Liu Xinyu CFA
Event: At 20:30 Beijing time on April 25, the United States released GDP data for the first quarter of 2024.
Core conclusion: The sharp slowdown in GDP in the first quarter of the United States is in line with the seasonal pattern, and the real economic momentum such as consumption and investment is still stable and does not belong to obvious "stagnation". Affected by the sharp rebound in PCE inflation, the Fed's interest rate cut expectations have cooled sharply, and the market is currently expecting only one cut this year, as soon as September. Looking ahead, the U.S. economy is expected to remain resilient in the second quarter, and inflation is still the core influencing factor for interest rate cuts.
1. The annualized rate of GDP in the first quarter of the United States was 1.6%, significantly lower than the expected value of 2.4% and the previous value of 3.4%, the lowest since 2022Q3, and the annualized rate of PCE and core PCE inflation in the first quarter was 3.4% and 3.7% respectively, significantly higher than the previous value of 1.8% and 2.0%, which was the highest in the past four quarters.
2. In terms of sub-items, the performance of private consumption and private investment remained good, with only a slight decline from the previous quarter and higher than the historical average, while net exports and government spending fell sharply, which were the main drags. Historically, the annualized rate of U.S. GDP in the first quarter has tended to be seasonally low, reflecting factors such as holidays and weather. Therefore, we believe that the current "inflation" of the US economy is real, but there are no obvious signs of "stagnation" yet.
3. After the release of GDP data, U.S. stocks fell, U.S. Treasury yields and gold rose, and expectations of interest rate cuts cooled sharply. The market expects the probability of interest rate cut to drop from about 50% to about 35% in July, from 100% to about 70% in September, and the annual rate cut is expected to change from a high probability of 50bp to a high probability of 25bp.
4. At present, the New York Fed Nowcast model and the weekly economic index WEI both point to that the performance of U.S. GDP in the second quarter may be better than that in the first quarter, but the Bloomberg survey shows that the market consensus expects that the U.S. GDP will slow down significantly in the second quarter, and there is an expectation gap. The Fed may need to observe at least three months of inflation data that are in line with or below expectations before it is confident to cut rates, which means that the first rate cut will not be until September at the earliest, and if inflation data continues to be higher than expected, it may not cut rates until November or December, or even rule out not cutting rates this year.
5. Short-term focus: 4/26 US PCE inflation in March, 5/1 US ISM manufacturing PMI & ADP employment in April, 5/2 Federal Reserve interest rate meeting, 5/3 US non-farm payrolls in April & ISM services PMI.
Report Text:
1. The GDP of the United States slowed sharply in the first quarter, mainly due to seasonal factors, and inflation rebounded sharply from the previous quarter.
Overall performance: The real GDP of the United States in the first quarter was 1.6% quarter-on-quarter, lower than the expected value of 2.4% and the previous value of 3.4%, the lowest since 2022Q3, declining for two consecutive quarters, and the real GDP was 3.0% year-on-year, lower than the previous value of 3.1%, the second highest since 2022Q2. In the first quarter, PCE inflation and core PCE inflation were 3.4% and 3.7% respectively, significantly higher than the previous values of 1.8% and 2.0%, both hitting the highest in the past four quarters.
Sub-performance: The month-on-month pull rate of private consumption to the real GDP of the United States in Q1 fell to 1.7% from 2.2% in Q4, of which the consumption of durable goods and non-durable goods basically did not increase month-on-month, and the consumption of services continued to rise month-on-month. The month-on-month pull rate of private investment to the real GDP of the United States rose to 0.6% from 0.2% in Q4, of which the investment in housing, intellectual property and equipment increased month-on-month and the growth rate increased, the construction investment was flat month-on-month, and the inventory continued to decline month-on-month but the decline narrowed. The sequential pull rate of government spending fell from 0.8% to 0.2%, the lowest since 2022Q3, mainly due to the fact that the budget for the new fiscal year has not been passed, and the government is currently only relying on the temporary appropriation bill to maintain its operation, which limits the expansion of government spending. The pull rate of net exports fell from 0.3% to -0.9%, of which the pull rate of exports fell from 0.6% to 0.1%, and the pull rate of imports fell from -0.3% to -1.0%. It can be seen that the sharp slowdown in US GDP in the first quarter was mainly dragged down by the widening trade deficit and the reduction in government spending. If net exports and government spending are excluded and private consumption and investment are only calculated, the annualized rate of real GDP in the first quarter is 2.24%, which is only slightly lower than the 2.35% in 2023Q4 and higher than the average of 2.0% from 2000 to 2019, reflecting that the core economic momentum remains solid.
Seasonality: Historical data shows that the annualized rate of U.S. GDP in the first quarter tends to be the low point of the year, mainly because private consumption and inventories tend to fall seasonally in the first quarter, reflecting factors such as holidays and weather. Considering that the U.S. consumption and investment data are still performing well, we believe that the current "inflation" of the U.S. economy is real, but there are no obvious signs of "stagnation".
2. After the release of GDP data, U.S. stocks fell, U.S. Treasury yields and gold rose, and expectations for interest rate cuts cooled sharply.
Performance of major asset classes: After the GDP was announced, U.S. stocks fell first and then rose, the U.S. dollar index rose first and then fell, U.S. Treasury yields rose, and gold rose. As of the close of trading on April 26, the S&P 500 index fell 0.5%, but after the close, the U.S. stock index futures rose sharply as a number of companies reported better-than-expected first-quarter reports, the 10Y U.S. Treasury yield rose 6.1bp to 4.71%, the U.S. dollar index fell 0.2% to 105.6, and spot gold rose 0.7% to $2331.7 an ounce.
Changes in interest rate cut expectations: After the GDP announcement, the market expects the probability of interest rate cut to drop from about 50% to about 35% in July, from 100% to about 70% in September, and the annual interest rate cut is expected to change from a high probability of 50bp to a high probability of 25bp.
3. Continue to prompt: The U.S. economy is expected to remain resilient in the second quarter, and the Fed should not be too optimistic about cutting interest rates.
U.S. Economic Outlook for the Second Quarter: As of April 19, the New York Fed Nowcast model estimates the annualized rate of real GDP in the United States for the second quarter at 2.7%, which is based on the 2.2% estimate for the first quarter, that is, the model believes that the quarter-on-quarter GDP growth rate of the United States will rebound in the second quarter, which is also in line with the historical seasonal pattern. At the same time, the weekly economic index WEI averaged 1.73% in the first three weeks of April, up from 1.66% in the first quarter, and has shown a recent upward trend, which also points to the fact that the US economy may perform better in the second quarter than in the first quarter. According to the latest Bloomberg survey, the market consensus expects the US GDP to be 1.5% quarter-on-quarter in the second quarter, which is also based on the expected value of 2.2% in the first quarter, that is, market institutions believe that the US economy will slow down significantly in the second quarter, which means that there is an expectation gap, especially when the GDP base in the first quarter is low.
Fed interest rate cut outlook: In the previous report, we have repeatedly reminded that the Fed should not be too optimistic about interest rate cuts in the context of the resilience of the U.S. economy + secondary inflation. Given that U.S. inflation has been higher than expected for four consecutive months, the Fed may need to observe at least three months of inflation data that are in line with or below expectations before it is confident of cutting interest rates, which means that the first rate cut will not be until September at the earliest. Once the subsequent inflation data continues to be higher than expected, the Fed may not cut rates until November or December, or even rule out not cutting rates this year.
Short-term focus: 4/26 US March PCE inflation, 5/1 US April ISM manufacturing PMI & ADP employment, 5/2 Federal Reserve interest rate meeting, 5/3 US April non-farm payrolls & ISM services PMI.
Risk warning: the U.S. economy, the Federal Reserve's monetary policy, geopolitical conflicts and other unexpected evolution.
Contact: Xiong Yuan, Chief Economist of Guosheng Securities, Liu Xinyu, Guosheng Macro Analyst, Yang Tao, Guosheng Macro Analyst, Liu Anlin, Guosheng Macro Analyst, Mu Renwen, Guosheng Macro Analyst, Zhu Hui, Guosheng Macro Analyst, Xue Shuning, Guosheng Macro Research Assistant.