US Q1 GDP figures came in as somewhat of a shocker for those betting that it will soon be back to lower rates for the Fed after delivering a final 25 bps rate hike next week. For the first time in over a month, markets reacted to underlying dynamics rather than to headline weakness. Quarterly annualized growth of 1.1% came in below consensus (1.9% Q/Qa) but the key consumption component accelerated to a 2-y high of 3.7% Q/Qa. Importantly, there was a very big drag from inventories with business investments being the only real weak point. Core PCE deflators accelerated unexpectedly from 4.4% Q/Q to 4.9% Q/Q, the fastest since Q1 2022. So the data suggest that the US economy remains more resilient, inflation more stubborn and so far signs of the feared credit crunch are absent. In turn, these could result in some hawkish linings in the Fed statement and Powell’s press conference next week which will go against current market positioning (rate cuts later this year). March income and spending data and the Q1 employment cost index are likely the centerpieces at today’s US eco calendar and will be interpreted in a same way as US GDP numbers yesterday. Monthly PCE deflators (March) can be derived after yesterday’s quarterly number with the April Chicago PMI likely to play second fiddle as well.
US Treasuries underperformed German Bunds. US yields closed 4.8 bps (30-yr) to 11.9 bps (2-yr) higher. The US 2-yr and 10-yr yields respectively closed above 4% and 3.5%. Changes on the German curve ranged between +4.2 bps (30-yr) and +6.5 bps (3-yr). US stock markets rallied 1.57% (Dow) to 2.43% (Nasdaq). Yesterday’s data were strong enough to put aside imminent recession fears, but not strong enough to prompt the Fed into an extra rate hike for example in June. The US dollar loved the immediate interest rate response with EUR/USD diving from 1.1050 to 1.10, but the greenback struggled with positive risk sentiment during the US session and with the same dilemma as stocks. For EUR/USD to end the week below 1.10, it will probably need to come via a weaker euro (not our base case). Today’s EMU calendar eyes attractive with Q1 GDP figures, but also national inflation numbers in Germany, France and Spain. Especially the direction of core inflation will be closely watched and could be decisive in tilting the odds (currently 80-20) to either a 25 bps or a 50 bps ECB rate hike next week. We stick with our 50 bps rate hike call on grounds of trends in core and wage inflation, the still relatively low current interest rate level, a resilient economy and tight labour market and backed by several ECB members putting the possibility on the table. Apart from the April EMU CPI number, the ECB’s Q1 credit and lending survey will be released as well next week ahead of Thursday’s policy meeting.
In the first meeting presided by the new Governor Ueda, the Bank of Japan left the key parameters of its policy unchanged but changed its forward guidance. The short-term policy rate remains at -0.1%. The BOJ in its Yield Curve Control policy will continue to buy an unlimited amount of government bonds to keep the 10-y government bond yield at around 0%, with a tolerance band for the yield to deviate by 50 bps plus or minus the target level. In its forward guidance, the BOJ deleted the reference to the impact of Covid 19. It also didn’t repeat that ’it expects short- and long term policy interest rates to remain at their present or lower levels’. The guidance now reads: ‘The bank will continue to maintain stability of financing, mainly for firms, and financial markets, and will not hesitate to add easing measures if necessary’. The BoJ also announced to conduct a broad-perspective review of monetary policy as this policy over the previous 25 year has resulted in various easing measures that have interacted with and influenced with areas of Japan’s economic activity, prices and the financial sector. The BOJ indicates a planned time for the review of around one to one and a half years. The Japanese 10-y government yield dropped from 0.485% to 0.43% after the BOJ policy announcement. The yen weakened with USD/JPY trading near 134.75 rising from the 134 area. Before the announcement of the BOJ policy decision, Tokyo April CPI figures printed again stronger than expected with the headline rising from 3.3% Y/Y to 3.5% Y/Y. Core inflation (ex food and energy) even accelerated from 3.4% to 3.8%. Other data series showed better than expected March retail sales (0.6% M/M and 7.2% Y/Y) and above consensus March production data (0.8% M/M and -0.7% Y/Y).The jobless rate on the other hand rose to 2.8% from 2.6%, but the participation rate also improved from 62.1% to 62.6%.