Outdone. Troubling US economic data released this morning suggests the Fed has lost control. What do the numbers say and how have the markets reacted?
U.S. gross domestic product (GDP), a crucial indicator of economic growth that measures the value of goods and services produced, grew at an annualized rate of 1.6% in the first quarter of 2024, led mainly through non-discretionary fixed investment and government spending and well below consensus expectations of 2.4%.
Simultaneously, the Personal Consumption Expenditures (PCE) Price Index, a key inflation variable, registered at an annualized rate of 3.4% for the first quarter, beating expectations of 3.4%. and up from 2.0% last quarter.
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Risk assets have climbed past their October 2022 bear market lows on confidence that central banks can keep inflation in check while maintaining relatively high employment levels and some economic growth, but at As the pieces of the puzzle continue to fall into place, this rosy outlook has become significantly less likely.
We have been led to believe that through careful manipulation of short-term interest rates, the US Federal Reserve could achieve at least a “soft landing» for the American economy, marked by below-trend growth (but not recessive) and a return to the 2% inflation target.
Unfortunately, the dislocation between economic growth and inflation suggests that the Fed has lost control of the situation…
Although the effects of interest rate manipulation are questionable, as suggested by the many periods in recent history in which Fed cuts have coincided with deepening recessions, markets had held out hope that easing rates would stimulate the economy; the presence of increasing inflation makes such reductions untenable.
As market participants were forced to further delay their rate cut expectations, risk assets sold off this morning and yields rose around 1.4% across the curve for reach their highest levels in 2024.
If economic growth continues to slow, it is likely that inflation will fall as demand declines. However, there is no guarantee that adopting lower interest rates will be enough to stabilize a global economy that is trending toward recession.
Crypto has offered investors huge returns, with BTC being the best performing asset of the last decade, but this asset class is known for exhibiting enormous volatility and has not existed during a prolonged economic downturn.
Yesterday, BlackRock's IBIT spot BTC ETF ended its 71-day streak of consecutive entries, and while entries into these instruments have served as a key narrative for spreading excitement around BTC, the risk is high that they turn into outflows as the economy continues to decline. .
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