The latest data shows that the US economy slowed down in the first three months of this year. But what worries investors more is that inflation accelerated faster than Wall Street expected, which brought shock waves to the market on Thursday.
The latest data from the Bureau of Economic Analysis shows that the "core" personal consumption expenditure (PCE) index excluding the food and energy categories with large fluctuations grew 3.7% year on year in the first quarter, higher than the 3.4% expected, and significantly higher than the 2% growth in the previous quarter.
This is the first quarterly increase in the Fed's preferred inflation indicator in a year, highlighting concerns that the Fed may not cut interest rates as quickly as expected.
Market losses caused by Meta's disappointing earnings on Wednesday accelerated after the release of the Bank of East Asia report. The three major stock indexes fell by more than 1% in the afternoon, while bond yields soared. Recently, the yield of 10-year US treasury bonds, which is unfavorable to the stock market, rose slightly, breaking 4.7% for the first time since early November.
Brett Ryan, a senior US economist at Deutsche Bank, said: "The most troublesome part for the Federal Reserve and the market (the data released on Thursday) is the core personal consumption expenditure, namely inflation data." "From the perspective of the Federal Reserve, this is really troublesome, and it is also the reason why the market reaction is very negative, because it really puts the Federal Reserve in an awkward position, and you start to question whether they can cut interest rates this year."
He added that the data could have an impact on another inflation report scheduled for Friday. Ryan pointed out that the quarterly price rise data released on Thursday showed that either the personal consumption expenditure (PCE) data in March would be hotter than expected, or the revised data would show that inflation in January and February was actually higher than previously expected. This does not bode well for the prospect of interest rate cuts.
Expectations for the Federal Reserve to cut interest rates fell further on Thursday. Since this year, the rate cut of the Federal Reserve has fallen sharply from the peak of nearly seven times in early January. According to data, the market is currently expected to cut interest rates only once this year.
The key to this move is to rewrite people's general expectations for inflation this year.
"Forecasters believe that 'the task is completed'. On the contrary, we now have a red warning signal," economist Jason Furman told Yahoo Finance. He served as chairman of President Obama's Council of Economic Advisers.
He added: "At any time this year, the Federal Reserve can't feel confident about inflation, so it won't cut interest rates, probably in December, or possibly not." The only thing that can make the Federal Reserve cut interest rates in the near future is that the deterioration of the job market is much faster than I expected. "
Jerome Powell, chairman of the Federal Reserve, recently reiterated that the Federal Reserve will not cut interest rates until it has "greater confidence" in the decline of inflation.
Powell said on April 16: "The recent data obviously did not give us more confidence, but showed that it may take longer than expected to achieve this confidence."
In other data released on Thursday, economic growth in the second quarter was lower than expected. The US GDP forecast for the first quarter shows that the economy grew at an annual rate of 1.6% during this period. Economists surveyed estimated that the annual growth rate of the US economy during this period was 2.5%.
Economists point out that a large part of the slowdown in economic growth comes from the volatility category that may rebound in the next quarter, which makes the rise in inflation the most critical part of Thursday's economic data.
"In terms of real GDP and real growth, there is almost nothing to worry about," Furman said. "There are many things to worry about in terms of inflation."
Many strategists believe that even if the Federal Reserve does not cut interest rates this year, the market is still likely to continue to rise. However, in the short term, the weakening of interest rate cut expectations has pushed up bond yields. In the current market dynamics, the rise in bond yields is not a welcome sign for the stock market.
Michael Cantrowitz, chief investment strategist of Piper Sandler, said: "We are now living in a bond driven stock market.
For now, the inflation data to be released will not help much in this regard.
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