Today’s U.S. economic data encapsulates the Fed’s plight with resurgent inflation now clearly undermining the U.S. economy. First quarter GDP was 1.6%, below both the 2.5% estimate and last year’s Q4 3.4%. Consistent with lower GDP, Personal Consumption (also Q1) was 2.5%, below the 3.0% estimate and 3.3% previous. The Q1 GDP Price Index was 3.1%, above a 3.0% estimate and significantly above Q4’s 1.6%. And finally, the Q1 Core PCE Price Index increased to 3.7% compared to the 3.4% estimate and Q4’s 2.0%. Higher inflation is driving soft real consumption.
The U.S. dollar is sharply higher following the Q1 data which lifted the dollar index from a loss of 0.33% to a 0.13% gain. The dollar is higher vs. most G10 currencies but significantly higher against emerging market pairs: +1.12% vs. MXN, +0.42% vs. BRL.
The USD/MXN is now +6.29% from April’s low and had been +10.14% just last Friday on initial reports that Israel had launched a retaliatory strike on Iran. In times of economic and global crisis traders are more frequently resorting to buying dollars against the peso.
U.S. Treasury yields are sharply higher (surprising no one) following the Q1 data. The biggest gains are in the near tenors, 3y-8yr +0.087%. The benchmark 10-year yield is +0.083% at 4.7258%, its highest since November of last year.
Fed Funds futures now imply the probability of only 1 ½ quarter point rate cuts this year, distant from January’s implied seven quarter point cuts by December.
Fewer rate cuts (and the discussion shifting to rate hikes) means businesses and consumers will be paying higher borrowing costs, the Achilles heel of equities. Global equity indexes are sharply lower with U.S. indexes bearing the brunt of the selloff: S&P 500 -1.48% and Nasdaq 100 -1.71%.
