Rates Fall Ahead of Inflation Day

Rates decline on economic data. Swap rates fell 3-4bps today after the highest continuing jobless claims since 2021 and several other data signaled an economic slowdown, despite an upward revision to Q1 GDP. The move preceded tomorrow’s PCE data, the Fed’s preferred inflation gauge. Meanwhile, Fed President Bostic reaffirmed his projection for one rate cut this year, consistent with the median Dot Plot projection.

Latest data point to slower growth. Today’s economic data largely pointed to more depressed economic growth than originally expected during the first half of the year. Q1 personal consumption growth was 1.5%, below the 2.0% expectation and the 2.0% prior estimate. Though GDP growth bumped up slightly to 1.4% from 1.3% in the prior estimate, it was the slowest quarterly reading since 2Q22. The Atlanta Fed’s GDPNow forecast now expects 2.7% GDP growth in Q2, down from 3% prior to today’s data. May durable goods orders were 0.1%, higher than expectations of a 0.5% contraction, but lower than April’s reading, which was downwardly revised from 0.6% to 0.2%.

PCE is expected to show decelerating inflation. While today’s quarter-over-quarter personal consumption expenditures (PCE) data was revised 0.1% higher to 3.7% in Q1, tomorrow’s data is expected to show slowing inflation across all measures. Core PCE is forecast to slow to 2.6% year-over-year, which would be the lowest rate of price growth since March 2021, and well off the cycle’s peak of nearly 5.6% in Feb 2022. Core month-over-month and headline year-over-year PCE is expected to slow by 0.1%, while monthly headline data is expected to decline to 0.0%.