5 Minutes Read
US yields spike, market mood slumps and Fed rate cut hopes get pushed to December
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
GDP grew slower than expected and inflation rate almost doubled in the first three months of 2024 in the world’s largest economy. The damp market mood led to a sharp sell-off in the S&P 500.
The 1.6% growth in US GDP between January and March 2024 was slower than what the street had estimated. Simultaneously, inflation rose to 3.4%, almost twice the 1.8% seen in the preceding three months.
These two factors, put together, may have forced traders to expect the first cut in interest rates by the US Federal Reserve in December, according to the latest update from Bloomberg.
Before the data was released, the consensus estimate on the street was that the American Central Bank would start cutting interest rates in September.
However, the odds would now recede after the latest GDP and inflation shock.
Thursday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — decelerated in the January-March quarter from its brisk 3.4% growth rate in the final three months of 2023.
A surge in imports, which are subtracted from GDP, reduced first-quarter growth by nearly 1 percentage point. Growth was also held back by businesses reducing their inventories. Both those categories tend to fluctuate sharply from quarter to quarter.
By contrast, the core components of the economy still appear sturdy. Along with households, businesses helped drive the economy last quarter with a strong pace of investment.
The S&P 500 was down 1.4% in early trading, slicing off two-thirds of what had been a big winning week so far. The Dow Jones Industrial Average was down 563 points, or 1.5%, as of 9:40 a.m. Eastern time, and the Nasdaq composite was 2.1% lower.
Meta Platforms, the parent company of Facebook and Instagram, dropped 14.1% even though it reported better profit for the latest quarter than analysts expected. Investors focused instead on big investments in artificial intelligence Meta pledged to make.
Treasury yields surged immediately after the economic report’s release as traders pulled back on bets for cuts to rates this year by the Federal Reserve. The yield on the 10-year Treasury jumped to 4.72% from 4.66% just before the report and from 4.65% late Wednesday. The two-year Treasury yield, which more closely tracks expectations for the Fed, jumped back above 5% to 5.01% from 4.93% late Wednesday.
The next Federal Reserve meeting is due to take place next week.
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