Note to readers: Please see Friday's report on monthly inflation data for March at this link.
The Federal Reserve's key inflation rate reared up in the first quarter, as U.S. GDP growth slowed more than expected, the Commerce Department reported Thursday. After the data, which supports a slower road to Fed rate cuts, the S&P 500 opened sharply lower, but came off its lows in afternoon trade.
The data may not be as bad as it looks. A surge in portfolio management costs, which go up with the S&P 500, accounted for the full upside surprise in core inflation.
Primary Fed Inflation Rate
The Federal Reserve's primary inflation gauge, the core PCE (personal consumption expenditures) price index, rose at a 3.7% annual rate in Q1, above 3.4% expectations. That followed back-to-back quarters of tame 2% annualized inflation, right at the Fed's target.
The headline PCE price index, which includes food and energy prices, rose 3.4% in Q1, up from 1.8% in Q4.
The hot quarterly core PCE inflation data provides a preview of Friday's big inflation report, which will break out monthly increases in the core PCE price index. Wall Street was expecting a 0.3% increase in March, putting the annual core PCE inflation rate at 2.7%.
However, the 3.7% quarterly increase implies a hotter reading for March and possibly upward revisions to data for January and February.
Here's one reason not to panic, though: The price for portfolio management and investment advice services surged at a 31.8% annual rate in Q1. If not for that, the core PCE price index would have climbed 3.2%.
GDP Growth
The U.S. economy grew 1.6% in Q1, missing forecasts of 2.3% growth, and well below from Q4's 3.4% pace.
Personal consumption expenditures grew a solid 2.5%, though a touch below 2.8% estimates. That came as goods consumption was flat, while spending on services rose 4%.
However, net exports of goods and services subtracted 0.86 percentage point from GDP, due to a flood of imports. The change in private inventory accumulation cut 0.35 percentage point from GDP growth.
Residential fixed investment grew at a 13.9% rate, adding a half-percentage point to GDP. Business equipment spending rose at a 2.1% pace, after declines the prior two quarters. Intellectual property products, such as software, saw 5.4% growth, the fastest since late 2022. However, spending on nonresidential structures dipped 0.1% after four quarters of double-digit gains.
Government's contribution to GDP growth slowed to two-tenths of a percentage point from a range of 0.5% to 1% over the prior six quarters.
Jobless Claims
Initial claims for jobless benefits fell 5,000 to 207,000 in the week through April 20, hitting a two-month low. So far claims aren't giving any sign that the labor market is softening.
Federal Reserve Rate-Cut Odds
After of Thursday's data, markets were pricing in 32% odds of a quarter-point Federal Reserve rate cut by the July 31 meeting, down from 44% ahead of the GDP report. Odds of a cut by Sept. 18. fell to 59% from 70%.
Markets are pricing in a year-end Fed funds rate of 5.025%, up from 4.96% before the GDP report. That builds in 58% odds of no more than one quarter-point rate cut this year.
S&P 500
After the GDP release, the S&P 500 recovered to a 0.7% loss, after sliding around 1.4% at the open in Thursday's stock market action. The S&P 500 clawed out the slimmest of gains for a third straight advance on Wednesday, leaving it 1% below the key 50-day moving average.
The 10-year Treasury yield climbed 6 basis points to 4.71%, the highest since early November.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
