26/04/2024
US dollar update
Summary
In the first quarter of 2024, the U.S. economy expanded at an annualized rate of 1.6%, significantly below the anticipated 2.5% and marking a decrease from the 3.4% growth recorded in Q4 2023. This slowdown has been attributed to challenges such as inflation and higher interest rates, with recent data indicating a persistent economic resilience albeit at a diminished pace. The Bureau of Economic Analysis highlighted that while GDP growth slowed, inflationary pressures remained evident; the price index for gross domestic purchases rose to 3.1% in Q1 from 1.9% in the previous quarter, and the personal consumption expenditures (PCE) Price Index escalated to 3.4% from 1.8%. Excluding food and energy, the core PCE price index increased to 3.7% from 2.0%.
The dollar index, reflecting these economic conditions, exhibited volatility. It initially fell following the GDP announcement but regained ground as market participants adjusted for the inflation data, particularly the rise in PCE. Despite this, the Federal Reserve’s policy stance appears firm, with no immediate expectations for rate cuts; according to the CME FedWatch tool, September (for the moment) is the most likely day for a reduction.
The labor market continues to show strength, which complicates the Federal Reserve’s policy decisions in the face of inflationary pressures. A recent report showed a decrease in initial jobless claims to 207,000, surpassing market expectations and reflecting fewer claims than the previous week’s total of 212,000. This robust labor data provides some support for the U.S. dollar amid concerns about slowed economic growth and rising inflation.
In such an environment, the 10-year U.S. Treasury Note peaked at 4.74% this week, a response to prevailing inflation forecasts and expectations for economic growth. The monthly Personal Consumption Expenditures Price Index is set to be published by the Bureau of Economic Analysis today. This upcoming release is a key indicator that may impact future monetary policy decisions.
In summary, the U.S. economy’s slower growth in Q1 2024 juxtaposed with persistent inflation complicates the Federal Reserve’s monetary policy path, affecting market sentiment and the valuation of the U.S. dollar. While GDP growth decelerated, inflationary pressures and a robust labor market suggest a cautious approach to any potential easing of interest rates.
Market Views & Opinions
UOB in today’s Macro Note says:
“We expect the US growth slowdown to be more apparent in 2Q 2024 onwards with a technical recession risk, but a soft landing remains our base case. As 1Q’s 1.6% exceeded our bearish forecast of 1.0%, we revise our US growth forecast slightly higher to 1.2% for 2024 (versus previous estimate of 1.0%), from 2.5% in 2023. The uncomfortably high 1Q core PCE, reinforces our view that the Fed will remain on hold beyond Jun 2024, where we price in two 25 bps rate cuts in Sep and Dec for 2024.”
CIBC in today’s Economic Flash, comments on the latest US news:
“The bottom line here is that GDP growth is not slowing enough to be confident that demand in the economy is being sapped, especially when judged against the strength in the labor market and higher-than-expected core inflation reading. Services prices jumped 5.4% q/q annualized in Q1, making the last two softer quarters look like flash in the pan.
The Fed cannot afford to trust its models and believe the economy can slow without seeing it first. Structural shifts in the US economy, be through changing attitudes towards consumption or firms and households being less exposed to interest rate changes, have made the Fed’s job very complicated as monetary policy’s effect on the economy is not what it used be. Powell and company will want to wait to see more progress on all fronts to regain confidence that we are headed back to”
IMPORTANT DISCLAIMER
The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.
