The GDP growth rate of the United States in the first quarter was lower than expected, and the core PCE price index for March released on Friday exceeded expectations, which made the market worried that the US economy might enter stagflation.
However, Citibank recently released a research report that although core inflation did not slow down further in March, increasing the possibility of interest rate cuts in July rather than June, Citibank still believes that it is wrong for the market to completely fade out of the pricing of interest rate cuts this year. This is because the fear of slowing growth will be the key factor for the Federal Reserve to consider cutting interest rates. The details of GDP in the first quarter show that the support for fiscal stimulus is weakening, and commodity spending is also relatively soft. Therefore, Citigroup believes that although inflation has not yet continued to slow down, the Federal Reserve will still cut interest rates this summer.
Stagflation? Citi: Interest rate will still be cut this summer
The data shows that the US GDP grew 1.6% month on month in the first quarter, 2.5% lower than the consensus of the market and 2.0% lower than the consensus forecast of Citigroup. Among them, consumption increased by 2.5%, commodity expenditure decreased by 0.4%, and service industry increased by 4.0%; Commercial investment rose by 2.9%, while residential investment rose by 13.9%. Overall, private final domestic demand slowed slightly from the fourth quarter to 3.1%.
At the same time, government expenditure slowed down compared with previous quarters, increasing by only 1.2%. The drag of net exports on economic growth was 0.9%, while inventories also dragged down 0.4%.
On Friday, the US Department of Commerce released data that the core PCE price index in March, after excluding food and energy, the preferred inflation target of the Federal Reserve, grew at 2.82% year-on-year, higher than the expected 2.7%, and the previous revised value was 2.8%. The month on month growth rate was 0.3%, which was in line with expectations and was the same as before.
In the face of stagflation data, Citigroup believes that this provides an uncomfortable background for Fed officials to consider when to cut interest rates this year. However, given that the details of GDP in the first quarter show that private domestic demand is strong, the focus now may be more on the strong inflation data.
The research report pointed out that the core PCE inflation unexpectedly rose sharply in the first quarter, and the core PCE inflation in March also exceeded expectations, but it is worth noting that this is in line with the forecast of the Federal Reserve.
Citigroup had predicted that the Federal Reserve would continue to cut interest rates in June based on the PCE core inflation figure of 2.7% in March.
However, as inflation intensified in March, Citigroup believes that the possibility of interest rate cut in July has increased compared with that in June. The research paper continues to believe that the market completely fades out of the expectation of interest rate reduction this year, which is too radical. It still believes that the Federal Reserve may start to cut interest rates this summer.
Maintaining growth is the key
The research paper pointed out that among these interest rate cuts, a key consideration would be growth concerns, because higher interest rates for a longer period of time would put pressure on demand.
According to the research report, although the details of GDP in the first quarter were more positive than the overall 1.6% growth, we still saw signs of slowing domestic demand. Investment in commercial equipment was stronger than expected, but shipments have slowed. Non residential investment and government expenditure also slowed down in the first quarter, which is consistent with the data of weak construction expenditure, because financial support for construction projects may have reached its peak. The contribution of government expenditure to GDP growth in the first quarter was 0.2%, compared with 0.8% to 1% in each of the past five quarters. In addition, strong residential investment should also weaken as higher interest rates affect housing demand.
Meanwhile, in the past few quarters, strong consumption has increasingly been driven by a few sectors, such as health care and financial services. The research paper said that inflation in these sectors did not increase in the past, which surprised Citigroup, because it showed that the actual expenditure was too high. If it is based on only a few sectors, the continuous strong service expenditure looks unstable. The commodity expenditure in the first quarter also declined, which usually led to a slowdown in the service industry.
Citigroup believes that, on the surface, private domestic demand and inflation in the first quarter are very strong, and the Federal Reserve will feel comfortable keeping interest rates unchanged. But looking ahead, due to the cracks in economic activity and labor market data, Citigroup expects that before inflation continues to slow, more obvious signs of weak growth will cause the Federal Reserve to cut interest rates.
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