The initial reading of Q1 GDP growth was better than expected at 3.2%, but the underlying components were less favorable. More than half of the topline growth figure was attributable to inventories and trade, while personal consumption and business investment readings were less robust. Real domestic final sales, which excludes the inventory effect and government spending, rose at just a 1.3% annualized rate, the weakest since 2013. Inventories rose despite a big drop in imports, which is another reflection of soft personal consumption. While business investment was relatively weak in Q1 as a whole, March data were more constructive for Q2 momentum.
Q1 GDP growth was better than expected, but the underlying components were less favorable.
Disinflation concerns have been voiced by some Fed leaders, leading the market to price a higher probability of a 2019 rate cut.
Fed Chair Powell did not share those concerns following the May 1 FOMC meeting, describing recent inflation trends as “transitory”.
A greater theme emerging from the Q1 GDP report from a market perspective were tepid inflation readings, and the March PCE data released a few days later confirmed a decline in year-over-year core inflation to 1.6%. This has sparked greater speculation that some Fed leaders may push for an “insurance” rate cut soon to combat disinflation risks. Chicago Fed President Charles Evans, a noted dove, recently expressed concern regarding core inflation staying near 1.5% for several months. “I would be extremely nervous about that, and I would definitely be thinking about taking out insurance in that regard,” said Evans. The fixed income market is now pricing a full 25 basis points rate cut by the end of this year.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.
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