New statistics reveal a slowdown in the US economy during the first three months of this year. But more worrying for investors was that inflation accelerated faster than Wall Street expected, shocking markets on Thursday.
The latest data from the U.S. Bureau of Economic Analysis shows that the “core” personal consumption expenditures (PCE) index, which excludes volatile food and energy categories, rose 3.7% year over year in the first quarter, beating expectations of 3.4%. Ta. , significantly higher than the 2% increase seen in the previous quarter.
This is the first quarterly increase in the Fed's preferred inflation measure in a year, highlighting concerns that the central bank will not cut rates as quickly as expected.
Market losses accelerated after BEA's announcement, triggered by Meta's disappointing results on Wednesday. report.All three major indexes were down more than 1% at midday. Meanwhile, bond yields soared. The 10-year Treasury yield (^TNX), the latest headwind for stocks, continued to rise, rising above 4.7% for the first time since early November.
“The difficult part is [of Thursday’s data release] Brett Ryan, senior U.S. economist at Deutsche Bank, told Yahoo Finance that PCE was a driver of inflation for both the Fed and markets. “And that's what's really troubling from the Fed's perspective and why the market reacted so negatively,” he said. Because that really puts the Fed in an awkward position where you start to question whether they'll be able to cut rates this year. ”
He added that the data could influence a separate inflation report due to be released on Friday. Ryan said Thursday's quarterly inflation readings could indicate either that the PCE reading for March was higher than expected or that inflation was actually higher than previously thought in January and February. He pointed out that it either shows Neither bodes well for prospects for rate cuts.
Expectations for Fed rate cuts, already down sharply from a peak of nearly seven cuts in early January, fell further on Thursday. The market is currently pricing in only one rate cut this year, but According to data from Bloomberg.
The key to the move was to rewrite consensus expectations for this year's inflation.
“Forecasters thought, 'Mission accomplished.' Instead, there are now flashing red warning signs,” said the economist who chaired the Council of Economic Advisers under President Barack Obama. Jason Furman told Yahoo Finance.
He added: “The Fed won't feel comfortable enough about inflation to cut rates any time this year. Maybe in December, but probably not. The only thing the Fed will cut anytime soon is “This means that the economy will deteriorate even more rapidly,” he added. The job market is tougher than I expected. ”
Federal Reserve Chairman Jerome Powell recently reiterated that the Fed will not cut rates until it has “more confidence” that inflation is falling.
Chairman Powell said on April 16, “Recent data clearly does not give us much confidence and instead indicates that it will likely take longer than expected to achieve that confidence.'' Stated.
Elsewhere in Thursday's data release, economic growth for the quarter was weaker than expected.Preliminary estimates of U.S. gross domestic product (GDP) for the first quarter showed the economy grew at an annualized pace of 1.6%. During that period. Economists surveyed by Bloomberg estimated that the U.S. economy grew at an annual rate of 2.5% during this period.
Economists said much of the slowdown in economic growth was due to the volatile category, which could recover in the next quarter, and the most important part of Thursday's economic data was a rise in inflation. .
“In this print edition, there was very little to worry about in terms of real GDP and real growth,” Furman said. “There was a lot to be concerned about in terms of inflation.”
Many strategists argue that the market could rise further even if the Fed doesn't cut rates this year. However, in the short term, bond yields rose as expectations for interest rate cuts diminished. Given current market trends, rising bond yields are not a welcome sign for stocks.
“We live in a very bond-driven stock market today,” said Michael Kantrowitz, chief investment strategist at Piper Sandler.
And so far, newly released inflation figures are doing little to help in this regard.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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