Several unfriendly economic data affected risk sentiment during the New York trading session. US GDP grew by only 1.6% in the first quarter, far lower than 3.4% in the fourth quarter, with personal consumption growth falling from 3.3% to 2.5%, commodity spending falling from 3.0% to -0.4%, inventories (-0.3%), net exports (-0.86%), and federal government spending (-0.2%) all dragging down growth in the first quarter, while the deflator jumped untimely to 3.1% (vs 1.6% in the previous quarter), the highest level since the second quarter of 2023, while local demand was the only bright spot, growing by 3.1%. At the same time, the first quarter core PCE price index growth jumped sharply to 3.7% (vs 2.0% in the previous quarter), hitting all remaining optimism and indicating that the March core PCE inflation data released today (and the focus of the Fed) has a chance to be higher than the market forecast of 2.7%.
Overall, weak economic output coupled with rising prices (can we say… stagflation?) is pretty bad for asset prices. The entire US Treasury yield curve jumped 6–8 basis points, with the 2-year yield briefly breaking 5% before falling back to 4.99%. Cumulative rate cut expectations for 2024 have fallen back to just 1.4, which is a pretty drastic change compared to the market expectations of 8 rate cuts (!!) in early January.
Unless the PCE inflation data turns out to be significantly lower than expected, the market expects Powell to do some "recalibration" at the FOMC press conference next week. Recall the earlier interview of Chicago Fed President Goolsebee:
"After six or seven months of very substantial improvement and inflation numbers close to 2%, we are now seeing levels well above that and we have to readjust and we have to wait and see."
— Chicago Fed Goolsebee
It is reasonable to expect the Chairman to withdraw his March comments and be forced to accept the fact that inflation has not developed as the Fed hoped. Another variable is whether the "hawkish recalibration" will affect the timing of the slowdown of the balance sheet, which is currently expected to start as early as May. It will be closely watched whether there are "few participants" who say they will continue to shrink the balance sheet under the current circumstances until they see a further deterioration in reserve levels.
US stocks were down 1% for most of yesterday, dragged down by poor Meta earnings results, before rebounding +2% after Microsoft and Alphabet earnings reports. Microsoft shares rose more than 5% on revenue growth across all sectors, while Google rose more than 11% after advertising and service revenue exceeded expectations and announced a $70 billion share buyback and its first dividend.
On the cryptocurrency front, investor attention remains distracted by the memecoin/BTC rune, which has had a strong run this year, with prices remaining stagnant for major coins. The BTC ETF has seen two consecutive days of outflows, continuing a more disappointing trend over the past four weeks, as interest from mainstream investors slows significantly. We currently maintain a neutral view on price trends and recommend remaining cautious.
Finally, following the SEC’s likely formal refusal to approve an ETH spot ETF in May, we saw Consensys fight fire with a lawsuit against the SEC, accusing the agency of “attempting to unlawfully regulate ETH through specific enforcement actions against Consensys and potentially others.”
The most important lesson learned in this field over the past few years? Always be optimistic about the role of lawyers in this industry. Have a great weekend everyone.
