Biden dealt blow as investors scale back bets on pre-election rate cut

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The US economy grew less than expected in the first quarter of 2024, at an annualised rate of 1.6 per cent, hit by higher inflation data that spooked investors.

The growth figure from the Bureau of Economic Analysis was far below analysts’ expectations of a 2.5 per cent rise and the revised rate of 3.4 per cent for the fourth quarter of last year.

The data released as part of the inflation-adjusted figures cast doubt on the potential for US Federal Reserve rate cuts.

The core personal consumption expenditures index, the Fed’s preferred metric, increased by more than expected in the first quarter.

On an annualised basis, core PCE rose from 2 per cent in the last three months of 2023 to 3.7 per cent, outstripping analysts’ predicted increase to 3.4 per cent. The latest PCE figures for March will be released on Friday.

In addition, the measure of inflation used to calculate gross domestic product rose from 1.9 per cent to 3.1 per cent.

Investors scaled back their bets on rate cuts after the data release, with the Fed’s first quarter-point reduction now expected in November rather than September.

Olu Sonola, head of US economic research at Fitch rating agency, described the inflation figure as the “real story” in the release.

“If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach,” he added.

US stocks dropped sharply after the New York opening bell on Thursday, with Wall Street’s benchmark S&P 500 dropping 1.4 per cent.

The 10-year US Treasury yield, which moves inversely to bond prices, climbed 0.08 percentage points to 4.73 per cent, the highest level in five months. The two-year yield also rose 0.08 percentage points to 5.01 per cent.

Sameer Samana, senior global market strategist at Wells Fargo, described the release as “almost stagflationary, where you’ve got growth slowing but prices are still a little bit stickier than markets and the Fed had hoped for”.

The robust US labour market and high levels of consumer spending had previously added to concerns that inflation will take longer than expected to bring down to the Fed’s 2 per cent target.

US President Joe Biden has been hoping the robust economy will help him overtake his Republican rival Donald Trump ahead of November’s election. But borrowing costs are still at a 23-year high, with traders trimming their bets on how many times the Fed will cut rates this year owing to persistent inflation.

Lindsay Rosner at Goldman Sachs Asset Management described Thursday’s figure as “a disappointing GDP number”, saying it reflected falls in the growth of consumer demand and government spending.

But she added: “That being said, the focus unequivocally is on inflation.”

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