Source: Golden Ten Data
Traders have postponed expectations of the Federal Reserve's first rate cut until December, and some economists have even issued a “stagflation” warning.
Although US economic growth in the first quarter was weaker than most economists' expectations, bond traders focused on another overheated inflation data and lower than expected initial jobless claims, rather than signs that the economy may finally cool down as expected by the Federal Reserve.
US GDP grew 1.6% in the first quarter, while a closely watched indicator of inflation rose 3.7%, higher than expected. After the data was released, the price of US Treasury bonds fell, driving 10-year and 30-year Treasury yields to the highest level in the year. Traders also postponed the Federal Reserve's first interest rate cut until December. The benchmark two-year US Treasury yield rose by about 9 basis points, slightly above 5%.
Swap traders currently expect the Federal Reserve to cut interest rates by only about 33 basis points for the full year of 2024, far lower than the more than 150 basis points they expected at the beginning of this year.
According to CME's US Federal Reserve Watch Tool, traders think the probability that the Fed will cut interest rates by 25 basis points in September is 44.6%.
For most of the time fighting the outbreak of inflation caused by the pandemic, Federal Reserve officials said they thought it would take a period of time for economic growth to fall below the trend level before inflation could actually match it. The economic growth rate of 1.6% reached this level in the first quarter of this year, and the economic growth rate for the previous period had always been higher than the Federal Reserve's median estimate of 1.8%.
Alberto Gallo, chief investment officer of Andromeda Capital Management, said that this data has left the Federal Reserve in trouble.
Nationwide Financial Market economist Oren Klachkin said that there is reason to believe that the 1.6% growth rate in the first quarter exaggerated the weakness of the economy, and the drag of imports and inventories on the economy is unlikely to continue until the end of this year.
However, he also added, “Inflation has not reached the point where the Federal Reserve can trust that the 2% target can be achieved. An environment with higher long-term interest rates may prevail.”
At the same time, some economists warned that the US economy might fall into “stagflation.” David Russell, head of global market strategy at Plantation Florida, said:
“After GDP falls short of expectations and inflation unexpectedly rises, there is a growing risk that the US economy will fall into stagnation. If inflation doesn't improve under such weak economic growth, you have to wonder if the downward trend in inflation will continue.”
edit/lambor