On Thursday, ING analysts highlighted that the latest U.S. economic data, indicating stronger-than-expected inflation and weaker GDP growth, could affect the upcoming core PCE deflator figure and reduce the likelihood of a near-term interest rate cut by the Federal Reserve. The U.S. first quarter GDP growth was reported at an annualized rate of 1.6%, falling short of the anticipated 2.5%. However, the core PCE deflator, a key inflation measure, rose by 3.7% annualized, surpassing the forecast of 3.4%.
The analysts pointed out that this inflation metric, which is a quarter-on-quarter annualized number, could be subject to revisions based on data from previous months. They noted that while there is a possibility that the core PCE deflator might still align with the current monthly consensus forecast of 0.3%, the recent data makes this seem less probable. The Treasury yields have reacted by moving higher, reflecting market expectations that a Fed rate cut is now more unlikely.
The breakdown of the GDP growth revealed several components influencing the economy. Consumer spending increased by 2.5% on an annualized basis, which was less vigorous than expected, while residential investment showed robust growth at 13.9%. Business capital expenditure (capex) was modest, and government spending growth slowed to 1.2%. Additionally, net trade and inventories negatively impacted the overall growth rate.
Despite the current GDP performance, the analysts at ING observed that the level of output remains below the potential trajectory had the pandemic not occurred. They expect more subdued economic activity in the coming quarters, citing a significant divergence between business surveys and official data. They anticipate that business caution will likely lead to slower hiring and wage growth, as well as conservative business capex, which will be reflected in the official GDP figures.
ING concluded that the rise in market borrowing costs this year is expected to influence economic activity and eventually moderate inflationary pressures. However, they firmly believe that the chance of a Federal Reserve rate cut before September is almost non-existent.
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