Yields Decline Again Ahead of Tomorrow’s Inflation Print

Q1 US GDP data fuels rate cut bets. Weak Q1 GDP overshadowed slightly elevated inflation data and fueled bets for earlier rate cuts. Yields dropped 6 bps at the front end of the curve, pushing the 2-year yield to 3.72%. Fed Funds futures now have a 25 bp move fully priced in by September’s meeting, and markets now view three cuts as more likely than two for 2025. Meanwhile, the S&P 500 (+0.80%) and NASDAQ (+0.97%) closed at all-time highs with the market continuing to bet on de-escalation in the Middle East and further progress on trade wars. To that end, Commerce Secretary Lutnick announced in after-hours trading that the US and China reached a trade deal two days ago, and that China will deliver rare earths to the US as part of the agreement.

US economy contracts in Q1. The third Q1 US GDP print was -0.5%, a sharper decline than the -0.2% second reading and the first quarterly economic contraction since Q1 2022. The decline was largely fueled by lower revisions to consumer spending and exports, where the former rose at the slowest pace since 2020 and the latter grew just 0.4% compared to the previous 2.4% estimate. Meanwhile, core QoQ PCE was 3.5% in Q1, the highest rate of inflation since Q1 2024. Tomorrow’s broader PCE slate is expected to show a 0.1% rise in core YoY PCE (to 2.6%) and flat core MoM PCE (0.1%) in May.

Pair of Fed officials argue July is too early for a rate cut. After the Fed’s Waller and Bowman argued in recent days that they may be in favor of a July rate cut, officials Collins and Barkin pushed back today. Boston Fed President Collins said, “We’re only going to have really one more month of data before the July meeting… I expect to want to see more information than that.” She largely attributed her doubts to trade levies, where “the impact of the tariffs is likely to unfold over the summer in a more material, visible way…” Meanwhile, Richmond Fed President Barkin argued, “There is little upside in heading too quickly in any one direction… given the strength in today’s economy, we have time to track developments patiently and allow the visibility to improve.”