Despite several challenges, the United States (US) economy has repeatedly demonstrated resilience while the rest of the world has contracted. In fact, the International Monetary Fund recently revised its forecast for US growth in 2024 to 2.7%, up from the 2.1% projected in January, citing stronger-than-expected employment numbers and consumer spending. Since late 2022, the US economy has consistently outperformed other developed market peers, and defied bleak predictions on the back of the US Federal Reserve’s (Fed’s) aggressive rate hiking campaign aimed at curbing inflation.
It would seem, however, that the world’s largest economy has undergone a notable transformation and is finally starting to run out of steam. The first quarter of 2024 witnessed a downturn in economic growth to a nearly two-year low as US gross domestic product (GDP) only expanded at a modest annualised rate of 1.6%, falling short of expectations and down from 3.4% in the previous quarter. This marks the second consecutive quarter of deceleration and the lowest growth since the contractions observed in the first half of 2022.
Several factors have contributed to this slowdown. Consumer spending has declined, primarily due to reduced consumption of goods, although spending on services saw an uptick. Non-residential investment also slowed, while investment in equipment rebounded, and intellectual property products accelerated. Government spending and exports also decelerated significantly, while imports surged.
This slowdown has been coupled with a surge in inflation that has reached eyebrow-raising levels. Core inflation, a key measure of inflation, rose more than anticipated, reaching 3.7% last quarter. Theoretically, with inflation typically lagging economic indicators, the weaker-than-expected GDP, coupled with declining savings rates (which have been impacted by sticky inflation), could potentially alleviate inflation throughout the year as aggregate demand slows. However, should inflation persist on its current trajectory and growth continue to moderate, the possibility of entering a stagflationary environment becomes more plausible. All eyes now turn to the release of the key PCE inflation reading on Friday.
The current economic landscape in the US presents a mixed picture. While many analysts remain upbeat about the resilience of the US economy, pointing to the robust labour market as a mitigating factor, current economic indicators hint at elements of stagflation. However, it is premature to definitively declare the onset of stagflation in the US, and as such, vigilant monitoring and judicious economic management will be the order of the day at the Fed.
MARKET RECAP
Recent developments in the global economy have sparked notable shifts across financial markets, driven by key economic indicators and central bank actions. Let’s delve into the impact of recent events on bonds, equities, commodities, and currencies.
Bonds
In the US, the 10-year Treasury note yield surged to over 4.7%, reaching levels unseen since early November. This uptick followed the release of US GDP data, which, despite showing weaker-than-expected growth in the first quarter of 2024, also revealed elevated inflationary pressures. This reinforced expectations that the Fed may hold off on interest rate cuts in the near term.
In the United Kingdom (UK), the yield on the 10-year government gilt rose above 4.33% in April, fuelled by hawkish expectations for the Bank of England (BoE) amidst further bond supply from recent issues. In addition, lingering concerns over inflation and robust economic indicators have pushed back expectations of an interest rate cut, with the BoE’s Chief Economist, Huw Pill, suggesting that such a move could be “some way off.”
Equities
US stocks have experienced a sharp decline, with major indices like the S&P 500 and Dow Jones sinking amidst the disappointing US GDP figures and mounting price pressures. While the US economy expanded at a slower pace than expected in the first quarter of 2024, core PCE prices surged, adding to investor concerns. Poor earnings reports from companies like tech giants Meta and IBM further dampened market sentiment, offsetting gains from others like Honeywell International.
In Europe, the DAX and FTSE 100 witnessed mixed performances. While the DAX declined slightly, tracking cautious sentiment amid corporate results, the FTSE 100 hit a record high. A speculative bid for Anglo American by BHP and a positive earnings updates from pharmaceutical company AstraZeneca bolstered market optimism, offsetting declines from others, such as retailer J Sainsbury.
In Japan, the Nikkei 225 and Topix Index were down yesterday in advance of this morning’s policy announcement from the Bank of Japan, which has seen both markets close up c.0.8% this morning.
Commodities
Brent Crude futures stabilised around $88/barrel, supported by a decrease in US crude stockpiles despite concerns about delayed rate cuts impacting demand outlooks. Tensions in the Middle East have eased, contributing to a gradual alleviation of supply-side concerns.
Gold was subdued amid readjusted expectations of Fed rate reductions following fresh economic data. While US GDP growth fell below estimates, accelerating consumer inflation strengthened the case for maintaining higher rates for a longer duration.
Currencies
The US Dollar Index saw a slight uptick, reflecting reinforced expectations of delayed rate cuts by the Fed amidst robust economic indicators. Despite weaker-than-expected GDP growth, accelerating inflation and declining jobless claims are signalling ongoing tightness in the labour market.
Meanwhile, the euro and pound faced slight declines against the dollar. While the eurozone showed signs of economic growth, statements from European Central Bank policymakers hinted at potential rate cuts. In the UK, solid PMI data led to reassessments of the monetary policy trajectory, with expectations of rate cuts being pushed back.
Key indicators:
GBPUSD: 1.2518
GBPEUR: 1.1662
GOLD: $2,338.59
BRENT CRUDE: $89.49
SOURCES: Bloomberg, Reuters News, Refinitiv and Trading Economics.
Written by Citadel Global Director, Bianca Botes
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