In the first quarter of this year, the U.S. financial market was shaken by economic growth and inflation shocks. This is because concerns over ‘stagflation’ (increasing prices during an economic downturn) have risen as sluggish growth has been coupled with unpredictable price indicators.
The two-year maturity U.S. Treasury bond interest rate exceeded 5% per year during intraday trading on the 25th (local time), hitting the highest level since November of last year. At one point on this day, it rose to 5.027% per annum, but then fluctuated around the 5% level. The interest rate on 10-year U.S. Treasury bonds also exceeded 4.7% per annum for the first time this year, rising to 4.72% per annum.
The New York stock market fell all at once. The Dow Jones Index closed trading at 38,085.80, down 375.12 points (0.98%) from the previous day. It plummeted by more than 6% points at the start of the market, but later reduced the decline. The S&P 500 index closed at 5,048.42, down 23.21 points (0.46%), and the NASDAQ closed at 15,611.76, down 100.99 points (0.64%).
The real gross domestic product (GDP) and personal consumption expenditures (PCE) price index results for the first quarter of this year, announced before the market opened on this day, hit the market. The GDP growth rate was calculated to be 1.6% on an annual basis, well below the market forecast (2.4%), while the core PCE price index (excluding food and energy) increase rate was 3.7%, exceeding the forecast (3.4%).
Disappointment spread through the market that inflation continued to rise amid the economic slowdown, making it more difficult for the U.S. Central Bank (Fed) to cut interest rates. According to FedWatch of the Chicago Mercantile Exchange (CME), the federal funds rate futures market lowered the possibility of a base rate cut in June from 16.5% the previous day to 11.5% today.
The U.S. economy ran on debt… Are we heading towards 1970s-style stagflation?
US first quarter growth rate and inflation ‘shock’… Is the ‘Goldilocks Economy’ going crazy?
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The U.S. economy, where ‘soft landing’ (soft landing of the economy) and ‘no landing’ (boom without recession) were discussed, was suddenly engulfed in a sense of stagflation (increasing prices amidst an economic slowdown). This is because the growth rate in the first quarter slowed down, falling far below market expectations, while prices remained high and remained unresolved. As some in the market even mentioned the ‘nightmare’ of the 1970s when the oil shock and economic recession coincided, the US government’s actions became more urgent, with US Treasury Secretary Janet Yellen personally taking action to extinguish the situation.
○Expectations of interest rate cuts fading
Regarding the announcement of the US first quarter gross domestic product (GDP) and personal consumption expenditure (PCE) results on the 25th (local time), market experts responded that it was “unexpected.” “The U.S. economy has been growing at a faster-than-expected rate recently, so this report is clearly an unexpected result,” said Matthew Ryan, head of market strategy at financial services company Every. “Until recently this year, there was a lot of talk about ‘Goldilocks’ (the economy is in the right state, neither overheating nor cooling down”), said Mike Reynolds, vice president of investment strategy at asset management company Glenmed. “I think so,” he said.
According to FedWatch of the Chicago Mercantile Exchange (CME) on this day, the federal funds rate futures market increased the probability that the U.S. Central Bank (Fed) will not cut interest rates by the end of the year from 0.7% a month ago to 18.8%. In relation to this, the Wall Street Journal (WSJ) reported, “The U.S. Central Bank’s (Fed) dream of lowering interest rates is fading away.” WSJ published an analysis late last year showing that market expectations for an interest rate cut had an effect on inflation. The interpretation is that the rise in the New York stock market may have driven up prices in the financial services sector. Because of this, it has been pointed out that the Fed may be repeating the mistakes of the 1970s.
Fed Chairman Jerome Powell ignited the New York stock market rally by saying, “The Fed has begun discussing the appropriate timing for an interest rate cut” immediately after the Federal Open Market Committee (FOMC) regular meeting in December last year. However, as the U.S. March consumer price index (CPI) and retail sales showed stronger than expected results, the hawkish government only last week said, “It will likely take longer than previously expected to reach greater confidence that inflation will fall to 2%.” made a statement.
○ Unreasonable fiscal policy ‘headwind’
Some point out that U.S. President Joe Biden has fueled inflation with a policy focused on fiscal expansion. Since taking office, President Biden has begun to actively stimulate the economy by utilizing finances such as △ Semiconductor Act △ Inflation Reduction Act (IRA) △ Student loan forgiveness.
WSJ analyzed that “excessive government bond issuance led to a rise in government bond yields and a strong dollar,” and that “the rapid expansion of the trade deficit affected the slowdown in GDP growth.” Looking at the details of the GDP growth rate, the export growth rate in the first quarter compared to the previous quarter was 0.9%, a sharp drop from 5.1% at the end of last year. Import growth rate soared from 2.2% to 7.2%.
The U.S. government is increasing the issuance of government bonds to cover massive financial expenditures. In the first quarter of this year, government bond issuance amounted to $7.2 trillion, a record high on a quarterly basis. “The fiscal deficit is as high as 6% of GDP,” said Jamie Dimon, CEO of JP Morgan. “This is driving much of the growth, but contrary to people’s expectations, it will have a different outcome in the form of inflation.”
As market concerns grew, Secretary Yellen immediately took action to extinguish the situation. He said, “The U.S. economy continues to be very strong,” and predicted, “Once more data is collected, the (GDP) indicator will be revised higher (in provisional or confirmed values).” Regarding the fact that the inflation rate in the first quarter did not fall as much as expected at 3.4%, Secretary Yellen also said, “The fundamentals of the U.S. economy show that inflation is falling to normal levels.”
New York = Correspondent Park Shin-young [email protected]
