This week’s GDP and PCE reports did not give the ever data dependent Fed any compelling reason to begin rate cuts anytime soon. In fact, the May, June, July and September meetings are now all “off the table” for cuts according to the futures markets. GDP (Thursday): The headline 1Q GDP estimate showed a 1.6% annualized increase, actually lower than expected – usually a sign of a “cooling” economy. But a look behind the numbers and the “final domestic sales” component showed a 3.1% expansion (hot). It gets hotter: the price component of GDP jumped 3.7% in the 1Q (annualized) with a whopping 5.1% increase in services costs. PCE (Today): March PCE numbers came in at 0.3% monthly with annualized core at 2.8% (well above the 2.0% target). Most of the inflation this year is not due to goods prices. It’s services (aka employment) and “ultra sticky” components like insurance, car repair costs, health care, etc. These items are not pressured by interest rates and therefore are not subject to the Fed’s only tool. The 10-year Treasury is now at 4.66% after hitting a 2024 high of about 4.75% earlier in the week. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.