Imports Hold Back US Economy In First Quarter, Inflation Flares Up

Economic

Summary:

The U.S. economy grew at its slowest pace in nearly two years in the first quarter amid a surge in imports and small build-up of unsold goods at businesses...

The U.S. economy grew at its slowest pace in nearly two years in the first quarter amid a surge in imports and small build-up of unsold goods at businesses, signs of solid demand that together with an acceleration in inflation reinforced expectations the Federal Reserve would not cut interest rates before September.

The cooler-than-expected growth reported by the Commerce Department in its snapshot of first-quarter gross domestic product on Thursday, which also reflected a downshift in government spending, exaggerated the moderation in economic activity. Domestic demand, a better growth measure, was strong as consumer spending moderated slightly while business investment picked up and the housing recovery gained steam.

Trade and inventories are the most volatile GDP components, and are often subject to revision when the government updates its growth estimates. Fed officials are expected to leave rates unchanged at the U.S. central bank's policy meeting next week.

"The Fed will likely see the GDP report as solid, while the upward surprise to inflation will support the central bank's case for waiting longer before cutting rates," said Daniel Vernazza, chief international economist at UniCredit.

GDP increased at a 1.6% annualized rate last quarter, the slowest pace since the second quarter of 2022, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast GDP would rise at a 2.4% rate, with estimates ranging from a 1.0% pace to a 3.1% rate.

The economy grew at a 3.4% rate in the fourth quarter. The first-quarter growth pace was below what U.S. central bank officials regard as the non-inflationary growth rate of 1.8%.

Excluding inventories, government spending and trade, the economy grew at a 3.1% rate after expanding at a 3.3% rate in the fourth quarter. That also dispels the notion that government spending was fueling the economy.

The U.S. economy, which has outperformed the economies of other advanced nations, is being supported by a resilient labor market.

U.S. Treasury Secretary Janet Yellen told Reuters in an interview that she was focused on consumer and business spending.

"Those two elements of final demand came in line with last year's growth rate ... so this is the underlying strength of the U.S. economy that showed continuing robust strength and an economy firing on all cylinders."

Price pressures heated up by the most in a year, with a measure of inflation in the economy increasing at a 3.1% rate after rising at a 1.9% pace in the October-December quarter.

The personal consumption expenditures (PCE) price index excluding food and energy surged at a 3.7% rate after increasing at a 2.0% pace in the fourth quarter.

The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. Inflation was boosted by increases in the costs of services like, transportation, insurance and housing, which offset a decline in goods prices such as motor vehicles and parts.

The strong readings pose an upside risk to March PCE inflation data due to be released on Friday, though much would depend on revisions to the January and February data.

The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range since July. It has raised the policy rate by 525 basis points since March of 2022.

Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields rose. Imports Hold Back US Economy In First Quarter, Inflation Flares Up_1

Imports Hold Back US Economy In First Quarter, Inflation Flares Up_1

Tight Labor Market

A significant slowdown in the labor market is not yet evident. The Labor Department's weekly jobless claims report showed initial claims for unemployment benefits fell 5,000 to a seasonally adjusted 207,000 in the week ending April 20.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, declined 15,000 to 1.781 million during the week ending April 13. The so-called continuing claims data covered the period during which the government surveyed households for April's unemployment rate.

Continuing claims fell between the March and April survey periods, implying the unemployment rate was likely unchanged after dipping to 3.8% last month from 3.9% in February.

Imports Hold Back US Economy In First Quarter, Inflation Flares Up_2

Low layoffs are keeping wages high, sustaining consumer spending, which accounts for more than two-thirds of economic activity. Consumer spending grew at a still-solid 2.5% rate, slowing from the 3.3% growth pace rate notched in the October-December quarter. Spending was driven by healthcare, financial services and insurance, which more than offset a decline in goods, including motor vehicles and gasoline.

Spending is likely to gradually cool this year. Lower-income households have depleted their COVID-19 pandemic savings and are largely relying on debt to fund purchases. Recent data and comments from bank executives indicated that lower-income borrowers were increasingly struggling to keep up with their loan payments.

Though income increased at a $407.1 billion rate compared with the fourth quarter's $230.2 billion pace, the gains were eroded by inflation and higher taxes. Income at the disposal of households after accounting for inflation and taxes rose at a 1.1% rate versus a 2.0% pace in the October-December quarter.

The saving rate decreased to 3.6% from 4.0% in the prior quarter.

"The recent stickiness in inflation lends downside risk to the near-term forecast for consumption as it could weigh on real disposable income," said Ryan Sweet, chief economist at Oxford Economics.

Inventories were whittled down, rising at a $35.4 billion rate after increasing at a $54.9 billion pace in the fourth quarter. Inventories subtracted 0.35 percentage point from GDP growth. Part of the spending was satiated with imports, which resulted in the trade deficit widening to $973.2 billion from $918.5 billion in the October-December quarter. Trade chopped off 0.86 percentage point from GDP growth.

Imports Hold Back US Economy In First Quarter, Inflation Flares Up_3

Government spending decelerated to a 1.2% rate from the 4.6% pace notched in the October-December quarter amid a decline in federal government outlays, mostly defense. Business spending picked up as companies invested in artificial intelligence.

Investment in nonresidential structures like factories contracted for the first time in more than year as the boost from policies by the Biden administration to bring the production of semiconductor manufacturing back to the U.S. faded.

Residential investment recorded its fastest pace of growth since the fourth quarter of 2020, thanks to rising home sales and housing construction, despite higher mortgage rates.

"Don't underestimate this economy," said Shannon Grein, an economist at Well Fargo.

Source: Reuters

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Economic

Forex

Imminent rate cuts bruise euro

It’s been a difficult year for the euro, which has already declined 3% against the dollar as the economic divergence between the Eurozone and the United States has convinced investors the ECB is set to cut interest rates faster and deeper than the Fed.

Economic growth in the euro area has been stagnant for about a year now and inflation has cooled rapidly, falling to just 2.4% in March. As such, ECB officials have made it abundantly clear they intend to slash rates in June, so that looks almost like a done deal. The real question is how they will proceed afterwards. Euro Turns To GDP And Inflation Data For A Lifeline _1

Euro Turns To GDP And Inflation Data For A Lifeline _1

In this sense, some leading indicators have flashed encouraging signals lately, with business surveys pointing to a reacceleration in growth and inflationary pressures. If that is reflected in official data soon, the ECB might decide to ‘play it slow’ with any subsequent rate cuts beyond June.

GDP and inflation data on the radar

Next week, the spotlight will fall on the first estimate of Eurozone GDP growth for Q1 and inflation stats for April, both due on Tuesday. The unemployment rate for March will follow on Friday.

Business surveys were consistent with GDP expanding by 0.3% in the first quarter compared to the preceding quarter, when growth was flat. The same surveys warned that inflation fired up again in April as companies raised their selling prices at a faster clip, reflecting rising wage and energy costs.

A reacceleration in both growth and inflation could throw the euro a much-needed lifeline, bolstering the single currency through the interest rate channel as traders unwind some bets of rapid ECB rate cuts.

Euro Turns To GDP And Inflation Data For A Lifeline _2

Looking at the euro/dollar chart, the pair has been trading below a downtrend line this year with a clear structure of lower highs and lower lows, which keeps the prevailing trend negative.

That said, a strong batch of data could allow the latest recovery to continue, perhaps towards 1.0800, a region reinforced by the 50- and 200-day simple moving averages (SMAs).

On the downside, a disappointment in the upcoming data can bring the pair under renewed selling interest. A potential drop back below the 1.0690 zone would shift the focus towards the April lows near 1.0600.

Euro outlook

In the bigger picture, the euro’s losses this year have been concentrated mostly against the mighty US dollar. Against the British pound, the single currency has only lost 1%, while it has risen almost 7% against the sinking Japanese yen. Euro Turns To GDP And Inflation Data For A Lifeline _3

Euro Turns To GDP And Inflation Data For A Lifeline _3

Judging by economic performance, these patterns can persist. The US economy is the strongest in terms of growth, so the dollar may continue to outperform in the foreseeable future, especially if stock markets remain shaky. The Eurozone and UK economies are in similar shape, which suggests those two currencies could continue to trade almost in lockstep.

Hence, the euro’s best chance at further gains may be against the yield-starved Japanese yen. In this sense, the main risk is the prospect of FX intervention by Tokyo. That said, the yen might need to fall even further before authorities step in.

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Samantha Luan

Central Bank

Economic

Forex

Asia's market spotlight on Friday falls on the Bank of Japan's policy announcement, as the cat-and-mouse game of when or if Tokyo intervenes in the currency market continues, and investors digest the latest U.S. mega tech earnings reports.

The BOJ decision and guidance from Governor Kazuo Ueda top the regional calendar, which also includes Tokyo consumer price inflation for April, producer price inflation from Australia and industrial production from Singapore.

Investor sentiment and overall risk appetite in early Asian trade on Friday will be determined in large part by the results from Microsoft, Alphabet and Intel reported after the closing bell on Wall Street on Thursday.

Microsoft and Google parent Alphabet were resounding beats. Shares in Alphabet jumped as much as 14% and Microsoft 6% in after-hours trading, but Intel shares slumped as much as 7%. Bank of Japan Center Stage, US Tech Supports_1

Bank of Japan Center Stage, US Tech Supports_1

Risk appetite was dealt a heavy blow on Thursday by surprisingly high U.S. inflation and soft GDP growth numbers, and the leap in bond yields to new highs for the year will do little to improve the mood in Asia and across emerging markets.

On the other hand, U.S. stocks on Thursday closed off their lows and after-hours earnings were mostly upbeat. If Asian stocks hold the line on Friday, they will register their best week since July last year.

All eyes, however, are on Tokyo, where the BOJ is expected to keep its key interest rate on hold and project inflation to stay near its 2% target in coming years on prospects of steady wage gains. Bank of Japan Center Stage, US Tech Supports_2

Bank of Japan Center Stage, US Tech Supports_2

But the yen's slide to a fresh 34-year low against the dollar means Ueda will have to walk a delicate line in maintaining a steady, calibrated path to exiting ultra-easy policy while at the same time addressing the huge pressure bearing down on the currency.

Erring too dovish risks pouring even more fuel on the current yen-selling flames, while an overly hawkish stance could threaten GDP growth and spark unwanted volatility in financial markets.

One option policymakers are considering, according to Jiji news agency, is weighing up measures to reduce the central bank's government bond purchases. This would likely push down the BOJ's bond holdings, ushering in a phase of quantitative tightening, Jiji said.

The yen goes into the BOJ decision at a 34-year low well below 155.00 per dollar and down 9% this year, Once again, it is on the defensive against other Asian currencies, much to the likely displeasure of policymakers in capitals across the continent.

In an interview with Reuters on Thursday U.S. Treasury Secretary Janet Yellen sidestepped the issue of Japanese intervention, but said such instances should ideally be rare and only in response to excessive volatility. Bank of Japan Center Stage, US Tech Supports_3

Bank of Japan Center Stage, US Tech Supports_3

Here are key developments that could provide more direction to markets on Friday:

- Bank of Japan policy announcement

- Japan Tokyo inflation (April)

- Australia PPI inflation (Q1)

Source: Reuters

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Alex

Economic

Central Bank

Japan is closely watching currency movements and is ready to take all necessary steps, Finance Minister Shunichi Suzuki said Friday, amid market caution about intervention to slow the yen's fall to 34-year lows against the U.S. dollar.

Suzuki said he is "concerned" about the negative aspect of the weaker yen, while noting that it also has a positive side. He declined to say when and what specific steps the government would take against excessive volatility in the currency market.

"In line with our policy, the government will continue to monitor currency market developments closely and take all necessary steps" against excessive yen fluctuations, he told reporters.

The yen's weakness stems from the still wide interest rate differential between Japan and the United States, despite the Bank of Japan's decision last month to increase interest rates for the first time in 17 years. Financial markets have pared back expectations that the U.S. Federal Reserve will start cutting rates as early as June after a series of robust economic data.

A weak yen inflates import costs for resource-scarce Japan and accelerates inflation, while boosting the overseas earnings of Japanese exporters in yen terms.

"We are concerned about the negative side of the weaker yen," Suzuki said, adding that responding to rising prices is a major priority for the government.

His comments came ahead of the conclusion Friday of the BOJ's two-day policy meeting, with attention focused on the Japanese central bank's assessment of the impact of the yen's recent depreciation on the economy, particularly inflation.

Some market participants say the yen could fall further depending on the outcome, boosting the likelihood of a yen-buying, dollar-selling intervention by Japan.

Japanese authorities have warned of "appropriate" action to rectify rapid yen movements in recent days, but the yen has already passed the 155 line, viewed by market players as a threshold that could prompt the government to step in.

Source:Kyodo News

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Samantha Luan

Economic

Stocks

Stellar earnings reports from Microsoft Corp. and Alphabet Inc triggered an after-hours tech rally that sent US futures higher. Japan’s stocks were rangebound before a monetary policy decision.

Futures contracts for the S&P 500 rallied 0.8% in early Asian trading, while those for the Nasdaq 100 rose more than 1%. The moves unwound Thursday’s losses of around 0.5% for each benchmark and came after Microsoft and Alphabet both beat Wall Street profit estimates. Snap Inc. also rallied in late trading on a bullish revenue projection.

Japanese stocks were mixed in opening trade on Friday, while South Korean shares rose. Australian shares retreated, weighed down by BHP Group Ltd., which declined following news of its takeover bid for Anglo American Plc. Futures contracts in Hong Kong also fell.

The yen was little changed before a Bank of Japan interest-rate decision and a Jiji report said authorities will consider measures to shrink government bond purchases at the Friday meeting. Policymakers are forecast to leave rates unchanged after the yen slid to the lowest level against the dollar since 1990 this week.

Treasuries opened little changed following further losses on Thursday when the latest US data pushed back expectations for Federal Reserve interest-rate cuts. Australian 10-year yields rose more than 10 basis points, while New Zealand’s equivalent benchmark yield climbed around seven basis points.

Tech Reverses US Stock Losses,BOJ In Focus_1

The US core PCE price index advanced at a faster-than-expected 3.7% clip. The print combined with a US gross domestic product data that trailed all forecasts to rekindle the specter of stagflation.

“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” said Chris Zaccarelli at Independent Advisor Alliance. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing.”

Tech Optimism

A $250 billion exchange-traded fund tracking the Nasdaq 100 climbed 1.2% after the close of regular trading on Thursday. In a sigh of relief to investors worried about lofty valuations of the sector that has powered the bull market, Alphabet crushed sales estimates and announced a dividend. Fellow megacap Microsoft also beat forecasts, lifted by corporate demand for the software maker’s cloud and artificial-intelligence offerings.

Investors have shown they are excited about the prospects of AI — but want tech companies to continue to focus on revenue and profit in the meantime.

Like other big techs, Alphabet has been plowing money into developing AI, a strategy that has helped drive demand for its cloud services. Google is a distant third in the cloud-computing market, trailing Amazon.com Inc. and Microsoft, but the company’s prowess in AI could help it close the gap.

Source:Bloomberg

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ING

Economic

Higher inflation catches the markets' eye, rather than weaker growth

US first quarter GDP growth is an annualised 1.6%, well below the 2.5% consensus expectation, but inflation is hotter with the core PCE deflator up 3.7% annualised versus 3.4% expected. This suggests, assuming no revisions to monthly data, that the core PCE deflator will come in above 0.4% today rather than the current 0.3%MoM consensus forecast. Unsurprisingly, Treasury yields have pushed higher as if that is the case, it makes a near-term Federal Reserve interest rate cut look even more unlikely.

That said, this inflation number is a quarter-on-quarter annualised measure, so any revisions to October through February could have influenced today's outcome - we won't know until when we get the monthly income and spending report. We could still get a 0.3%MoM, but we have to acknowledge that yesterday’s data makes it look less likely.

GDP still running below pre-pandemic trend levels

In terms of the GDP growth breakdown, consumer spending was softer than thought likely, rising 2.5% annualised, while residential investment was a very firm +13.9%. Business capex was subdued, government spending saw a marked slowdown to 1.2%, while weakness in net trade subtracted 0.9pp from the headline growth rate, and inventories subtracted a further 0.35pp. The chart above shows that while GDP has performed well, the level of output is still a couple of percentage points below where we perhaps could have been had the pandemic not happened, and instead, the economy had continued running at its 2024-19 growth trend. US GDP Growth Slows Markedly, And Inflation Remains The Focus_2

US GDP Growth Slows Markedly, And Inflation Remains The Focus_2

As for the growth outlook, we expect to see more subdued activity in upcoming quarters. The divergence between business surveys and official data is very wide. We strongly suspect that business caution will translate into weaker hiring and wage growth and subdued business capex, and that will eventually show up in the official GDP data. The move higher in market borrowing costs this year will also weigh on activity and eventually dampen price pressures in the economy. Nonetheless, there is next to no chance of a rate cut before September.

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Warren Takunda

Forex

Economic

The Canadian dollar (CAD) is feeling the heat, falling below the key 1.37 USD level and approaching a five-month low. This decline is primarily driven by two diverging forces: a sluggish Canadian economy and a strengthening US dollar.

Canadian Consumers Tighten Belts

Disappointing retail sales data is painting a picture of a Canadian consumer pulling back on spending. The first quarter saw no growth in retail sales, marking the slowest pace since mid-2023. This economic weakness adds pressure to the Bank of Canada (BOC) to consider rate cuts at its upcoming June meeting.

US Dollar Supported by Rate Hike Bets

On the other hand, the US dollar is benefiting from expectations of sustained interest rate hikes by the Federal Reserve. Persistent inflation and a robust labor market are fueling this sentiment, even if US GDP growth sputtered in the first quarter. This monetary policy divergence between the US and Canada is making the greenback a more attractive proposition for investors.

Technical Outlook

The technical outlook for the USD/CAD pair presents a mixed picture. Intraday bias currently sits in neutral territory, with the key support level at 1.3660 USD acting as a potential floor. A strong rebound from this level could signal a continuation of the near-term bullishness for the USD/CAD pair. Conversely, a sustained break below 1.3660 USD could trigger a deeper decline, potentially targeting the 55-day exponential moving average (EMA) currently sitting around 1.3592 USD.

Taking a broader perspective, the recent price action from the 2022 high of 1.3976 USD as a potential corrective pattern within a larger uptrend. This suggests that the current weakness might be a temporary pause before the uptrend resumes. In this scenario, strong support should emerge above the previously broken resistance level of 1.2947 USD, potentially leading to a rebound. A decisive break above 1.3976 USD would definitively confirm a resumption of the entire uptrend that began from the 2021 low of 1.2005 USD. The next potential target on that uptrend path could be the 61.8% projection of the Fibonacci retracement between 1.2401 USD and 1.3976 USD, coming in at approximately 1.4149 USD.

Shifting to shorter timeframes, particularly the 4-hour and 1-hour charts, the USD/CAD pair has been trading within a descending channel. Recently, the price action exited this channel and hit a resistance level, which is often associated with selling pressure. This presents two potential behavioral scenarios for the 4-hour timeframe.

The first scenario posits that if the pair is unable to break above the current resistance zone, it could retrace back down to the support level created by the previous order block (OB) that caused the price to jump. This support level would likely be situated around the area where the price exited the descending channel.

The second scenario takes into account the recent exit from the descending channel. This return to the resistance level could be interpreted as a pullback towards the broken channel before the uptrend continues. However, for this scenario to play out, the pair would need to decisively break above the resistance level and the 61.8% Fibonacci retracement level to target the next potential resistance zone. If this breakout fails to materialize, the first scenario becomes more likely.

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