A first look at U.S. growth for Q1 looked pretty solid, tilting the board slightly toward four Fed hikes this year; the European Central Bank faced its own deadline for rate hikes; Argentina brought out its heavy artillery to save the peso.
"It's not a recovery, it's an expansion… we're beyond the recovery already."
U.S. growth: First impressions Today’s data for Q1 growth will be refined in the coming weeks, but the initial draft is solidly positive as GDP ran slightly ahead of expectations at an annualized rate of 2.3%. Personal consumption was up 1.1% over Q4. The Employment Cost Index (ECI), an indirect measure of how employees are doing, also beat expectations, rising 0.8% over. Q4.
Perhaps most important: inflation is showing more signs of life, with Core Personal Consumption Expenditure (PCE) inflation at a 2.5% annualized rate for Q1 -- definitively above the Fed’s 2% goal.
Two more growth indicators: housing and sentiment. Sales of existing homes rose 1.1% month-over-month in March and the median sales price rose 5.8% year on year.
Inventory of available properties fell 7.2% to 1.67 million, the lowest March since 1999. Second, the closely-watched University of Michigan consumer sentiment survey, though down slightly from the March figures, exceeded estimates for April.
All this, combined with the ECI and GDP numbers, is leading some to wonder if the balance has now shifted toward having 4 rate hikes rather than 3 in 2018, to avoid “galloping” inflation. That change is reflected in the Fed Funds forward markets, where the imputed odds for four hikes have risen to 37%, and the three-hike figure eased to 44%.
European Central Bank: Squeeze play In previous statements, the ECB has indicated that it would announce, in June, a timetable for easing its monthly €60 billion bond-buying program. But recent data from Germany, Italy and France suggest that the relatively brisk pace of growth so far in 2018 may be fading. Though there’s been no hint of an intention to delay the plan’s debut past June, some observers have started to wonder out loud about that possibility.
That may have been behind ECB President Mario Draghi’s response on Thursday to a question about a “stealth taper” slowdown in actual bond purchases. Mr. Draghi unequivocally denied the report, saying that while the bank has a “certain flexibility” and intends to use it to buy at good prices, it’s “wrong” to focus attention on weekly or monthly variations.
The ECB’s steadfastness appears not to be echoed by the Bank of England, whose Governor Mark Carney was subtly clear that its widely-expected May rate hike isn’t a certainty. That change was underscored by the UK’s disappointing 0.1% quarterly GDP growth rate.
Argentina: Currency blues Year to date, the Argentine peso is the worst-performing emerging-market currency, down over -9.3% vs. the U.S. dollar, worse than the sanction-pressured Russian ruble’s -7.24% fall. In reaction, the central bank boosted its benchmark rate on Friday by 3 percentage points to 30.25%, effective immediately. The central bank had already spent $3 billion to stabilize its currency during the previous week, including over $800 million on Thursday April 26. The move appeared to have succeeded, at least as of mid-day Friday, with the peso slightly above its opening price of 20.55 per U.S. dollar. But the longer-term problem is inflation; with consumer prices running at 20.25% in March 2018, it may take more than one central bank shock to bring the economy back into line.
All data Source: Bloomberg, April 27, 12PM EDT or as of its release date.