The cuts in the US are moving away, clearly inflationary data

Yesterday's US GDP report was what the Federal Reserve didn't want to see. Lower economic growth and clearly inflationary data. This report led to a marked decline in expectations for interest rate cuts this year and today's monthly report PCE inflation could theoretically lead to Powell being forced to carry out a hawkish pivot next week.

The full increase won't be available until November

GDP in the US increased for the first quarter of 2024 at an annualized rate of 1,6%. This is well below the expected level of 2,4% and below the Q2023 3,4 level of 3,1%. However, these data did not lead to such panic as the inflation part of the GDP report. The deflator rose to 3,0% with expectations of 1,7% and the previous level of 3,7%, while the PCE Core rose to 3,4% with expectations of 2,0% and with the previous level of 75%. It is this data that has led to the total probability of one increase in all meetings through September being XNUMX%. The full increase is not estimated until November.

It is worth mentioning that half a year ago, there were even 4-5 price reductions until September interest rates, and now it may be that the rate will be reduced only once or even at all. There is considerable speculation that the rebound in inflation earlier this year was not a bump in the road at all and that the Fed will have to keep interest rates unchanged for a longer period of time. Although there is no talk of resuming price increases at the moment, especially when we see weaker consumption data, such a scenario cannot be ruled out.

The Fed targets inflation on time

Digging deeper into the US GDP report, we see that private consumption was the largest contributor to growth, but there is a decline compared to previous quarters. The negative contribution comes from net exports, which could be related to, among others, with limited exports of energy raw materials recently. On the other hand, private investments are encouraging, which should result in an increase in inventories in the coming quarters. Therefore, we cannot write off the American economy yet, although it may run out of breath with high interest rates.

Today, PCE inflation is expected to rebound slightly to 2,6% y/y. However, if we had a reading of 2,7%-2,8%, then the dollar could show strength again. The base rate is expected to fall to 2,7% from 2,8% on an annual basis, while both indicators are expected to increase by 0,3% m/m, similarly to previously. The Fed believes that the level of 0,2% m/m will achieve the inflation target within the forecast period.

In Japan, no changes

It is also worth mentioning Bank of Japan, which has kept the policy unchanged and does not indicate that the situation will change in the near future. Inflation forecasts for 2024 indicate an increase in inflation to 2,8%, but a decline to 1,9% next year and a rebound to 2,1% in 2026. However, if the BOJ notices a revival in consumption due to the recent increases, then it will be ready for another hike. The lack of continuation of the hawkish turn led the USD/JPY pair to increase above 156. At this point, it is said that the next place for possible intervention will be around the level of 160.

Before 10:00 we were paying PLN 4,0250 for the dollar, PLN 4,3188 for the euro, PLN 5,0342 for the pound and PLN 4,4137 for the franc.

Source: Michał Stajniak CFA, XTB