Quarterly Economic Data Pushes out Fed Cutting Expectations

Rate cut timeline delayed again. Rate cuts are not fully priced in until December after today’s PCE data came in well above forecasts, though November remains the odds-on favorite for the first rate cut. The data prompted a 4-7bp rise across the curve, with the 2y UST yield again hovering near 5%. The entire yield curve is now above 4.70%, and the 2s10s spread is nearly its least inverted since January. Meanwhile, GDP growth was significantly lower than expected in Q1, which forced equities lower. The DJIA led major equity index declines at -0.98% while the NASDAQ fell 0.64%.

Quarterly PCE growth tops estimates, while economic growth slows. Core PCE growth of 3.7% in 1Q24 exceeded 3.4% estimates and climbed sharply compared to last quarter’s 2.0% growth. Quarterly GDP growth, on the other hand, declined to 1.6% vs. 2.5% surveyed estimates and last quarter’s 3.4% growth. Commenting on the releases, head of US economic research at Fitch Ratings Olu Sonola said, “If growth continues to slowly decelerate, but inflation takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach.” 

March headline and core PCE await. Don’t turn away just yet, as tomorrow’s PCE data could be even more important than today’s print. Core PCE is expected to decelerate on an annualized basis to +2.7% from +2.8%, which would be its lowest level since March 2021. Core MoM PCE is expected to remain flat at +0.3%. Elsewhere, personal income is expected to increase to 0.5%, while personal spending is expected to fall to 0.6%.