Recent Data Reaffirms Pause
- The latest snapshot of the U.S. economy rattled stock and bond markets with two bits of potentially disappointing data: slower economic growth and still-firm inflation. Gross domestic product expanded at a 1.6% seasonally and inflation adjusted annual rate in the first quarter, the Commerce Department said in April, a pullback from last year’s quick pace. That lagged the 2.4% projected by economists polled by the Wall Street Journal. The report also suggest inflation, using the Fed’s preferred gauge, was likely firmer than expected in March. – WSJ
- US core PCE inflation remained firm in March, marking a quarter of robust inflation figures. The unexpected rise in January was attributed to start-of-the-year price increases, while the persistence in February and March stemmed from a narrow set of services. Despite this, the fundamental factors for disinflation are intact: goods prices are falling, and a more balanced labor market is expected to stabilize wages and service prices. Moreover, long-term inflation expectations among households, firms, and investors are well-established. While the anticipated decline in inflation may have been delayed, not derailed, the Fed will likely require several favorable inflation reports to restore confidence in the disinflation trajectory. – GSAM
- Investors are pushing back their expectations of interest rate cuts around the world, as the Federal Reserve’s battle with price pressures complicates other central banks’ loosening plans. As the US reported the US reported the latest in a string of poor inflation figures, markets reined in their forecasts for rate cuts by the European Central Bank and the Bank of England, as well as by the Fed itself. While at the start of the year investors had expected as many as six quarter-point cuts this year, they now expect one or two.– FT
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