The Federal Reserve’s benchmark inflation rate rose in the first quarter as U.S. GDP growth slowed more than expected, the Commerce Department reported Thursday. S&P 500 futures extended early losses following data showing a slower path to Fed rate cuts.
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However, the data may not be as bad as it looks. A rise in portfolio management costs, which rise with the S&P 500, was responsible for the full surprise.
Fed primary inflation rate
The Federal Reserve’s primary inflation indicator, the core PCE (personal consumption expenditures) price index, rose at an annual rate of 3.7% in the fourth quarter, above expectations of 3.4%. That followed two consecutive quarters of a tame 2% annual inflation rate, exactly in line with the Fed’s target.
The PCE headline price index, which includes food and energy prices, rose 3.4% in the first quarter, compared with 1.8% in the fourth quarter.
The hot core PCE quarterly inflation data provides a preview of Friday’s big inflation report, which will break down monthly increases in the core PCE price index. Wall Street expected a 0.3% rise in March, translating to annual core PCE inflation of 2.7%.
However, the 3.7% quarterly increase implies a hotter reading for March and possible upward revisions to January and February data.
But there’s a reason not to panic: Prices for portfolio management and investment advisory services rose 31.8% annually in the first quarter. Without this, the core PCE price index would have increased by 3.2%.
GDP growth
The U.S. economy grew 1.6% in the first quarter, missing forecasts for 2.3% growth and well below the 3.4% pace in the fourth quarter.
Private consumer spending rose a whopping 2.5%, although just below estimates of 2.8%. This happened because consumption of goods stagnated while spending on services increased by 4%.
However, net exports of goods and services reduced GDP by 0.86 percentage points due to a flood of imports. The government’s contribution to GDP growth also slowed to two-tenths of a percentage point from 0.5% to 1% in the previous six quarters.
This story will be updated. Please check back for more data and analysis.
Federal Reserve Rate Cut Chances
After Thursday’s data, markets were pricing in a 39% chance of a quarter-point rate cut by the Federal Reserve by the July 31 meeting, compared with 44% before the GDP report. The probability of a cut by September 18 fell from 70% to 63%.
Markets are pricing in a Fed funds rate of 5% at year-end, up from 4.96% before the GDP report. This results in a 54% probability that interest rates will not be cut by more than a quarter point this year.
S&P 500
Following the GDP release, S&P 500 futures fell 1.3% in early Thursday trading. The S&P 500 is attempting to rise for a fourth straight session after posting its narrowest gains on Wednesday, leaving it 1% below the key 50-day moving average.
The 10-year Treasury yield rose 8 basis points to 4.73%, its highest level since early November.
Be sure to read IBD’s “The Big Picture” column after each trading day to learn the latest developments in the stock market and what they mean for your trading decisions.
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