The initial estimate for the US first-quarter real GDP growth is 1.6%, the lowest in two years, while core PCE prices accelerate for the first time in a year

Rapid inflation, cooling consumer and government spending, the U.S. economy sharply slowed in the first quarter, reaching its lowest growth level in nearly two years.

On Thursday, data released by the U.S. Department of Commerce showed that the actual GDP for the first quarter of the United States increased at an annualized rate of 1.6%, far below the market's expected 2.5%, and a significant slowdown from the 3.4% in the fourth quarter of last year.

The GDP weighted price index for the first quarter was 3.1%, higher than the expected 3.0%, nearly double the 1.6% in the fourth quarter.

In terms of quarterly inflation data released at the same time, personal consumption expenditure (PCE) increased at an annualized rate of 2.5%, significantly slower than the previous 3.3%, also falling short of the expected 3%; the core PCE price index, excluding food and energy, increased at an annualized rate of 3.7%, exceeding the expected 3.4%, nearly double the previous 2%, marking the first quarterly growth in a year. This shows that core inflation remains stubborn.

After the release of first-quarter GDP data, the three major U.S. stock index futures fell, the U.S. 10-year Treasury yield rose by about 4 basis points in the short term, reaching 4.694%. The U.S. dollar index rose nearly 20 points in the short term, reaching 105.82.

Slowing consumer spending, stubborn service sector inflation, stagflation on the horizon?

As an important pillar of the economy, consumer spending in the first quarter grew by 2.5%, lower than the 3.3% growth in the fourth quarter of last year and below the expected 3.0%.

There has also been a change in spending patterns this quarter, with goods spending declining by 0.4%, largely due to a 1.2% decrease in the purchase of durable goods, while service spending increased by 4%, reaching the highest quarterly level since the third quarter of 2021.

In the first quarter, inflation surged significantly, with service sector inflation excluding housing and energy rising by 5.1%, nearly double the growth rate of the previous quarter. The March PCE index, consumer spending, and income data will be released on Friday.

Since inflation began to soar, consumers have generally kept pace with inflation, which has eroded wage growth. The personal savings rate in the first quarter dropped from 4% in the fourth quarter to 3.6%. Adjusted for taxes and inflation, income grew by 1.1% during the same period, lower than 2% At the state and local levels, fixed investment and government spending helped keep GDP positive this quarter, while a decrease in private inventory investment and an increase in imports caused negative impacts.

It is worth noting that residential investment surged by 13.9%, marking the largest increase since the fourth quarter of 2020, mainly driven by broker commissions, other ownership transfer costs, and new single-family home construction, which may be a positive signal for the real estate market.

Private inventory changes continued to have a negative impact on GDP for the second consecutive quarter, contributing -0.35% to GDP, a slight improvement from -0.47% in the fourth quarter.

How will interest rate cut expectations evolve?

After the data release, the swap market no longer fully prices in a rate cut by the Federal Reserve before December. In addition, traders expect the first rate cut by the Federal Reserve to be delayed until December. Interest rate swap traders now expect the Federal Reserve to cut rates by only about 35 basis points in 2024, much lower than the initial forecast at the beginning of the year, which anticipated more than six rate cuts of 25 basis points or more this year.

At the time of this report's release, the market was nervous about the monetary policy outlook and when the Federal Reserve would start cutting rates. Due to persistently high inflation, investors had to adjust their views on when the Federal Reserve would start easing. Previous rate cut expectations indicated that rate cuts would begin in September, and the Federal Reserve might only cut rates once or twice this year.

Jeffrey Roach, Chief Economist at LPL Financial, pointed out:

As consumer spending enthusiasm may be nearing its end, the economy may further slow down in the coming quarters. In addition, with inflation continuing to put greater pressure on consumers, the savings rate is declining. We should expect that with slowing total demand, inflation will ease somewhat this year, but reaching the Federal Reserve's 2% target remains distant.

Analyst Paul Davidson stated:

At the beginning of this year, the economy slowed more than expected due to weak business inventories and exports offsetting strong consumer spending and a housing construction boom. The first quarter GDP growth of 1.6% announced by the U.S. Department of Commerce was lower than the robust 4.1% growth in the second half of last year and below market expectations.

The disappointing economic performance in the first quarter may soften the views of Federal Reserve officials. Previously, due to the accelerated rise in the first quarter consumer price index, Federal Reserve officials indicated no urgency to cut rates. However, some analysts still believe that the economy will significantly weaken later this year, while inflation will rapidly decline, allowing the Federal Reserve to cut rates multiple times.

The Federal Reserve will hold a meeting next week, with expectations to maintain rates at their highest level in twenty years. Traders will analyze Federal Reserve Chairman Powell's remarks to look for the latest clues on loose monetary policy