Where Are We Now?

Macro Markets

This week will contain two exceedingly important government reports on the US economy and a third number used by the Fed often. These two reports will be important in guiding the final decision of the Federal Reserve at the FOMC meeting next week.

GDP

According to Bloomberg’s survey of economists, the advance reading of the US real GDP growth, scheduled to release on Thursday, is expected to slow to 2% Q/Q annualized in Q1, down from 2.6% in Q4 last year. An average of the current forecasts predicts that the first quarter of GDP for 2023 will come in at 1.8%. If correct, this would indicate that the economy continues to contract from the 2.6% GDP reported in the fourth quarter of last year. Despite inventory drawdown potentially dragging GDP growth, personal consumption is expected to come in strong at 4% Q/Q annualized and be the key driving force to sustain GDP growth in Q1.

Real GDP is expected to increase by 2% in the first quarter, while the GDP price index is expected to be at 3.7%, indicating a 5.7% nominal GDP growth rate. The Atlanta Fed GDPNow model predicts a faster-projected growth rate of approximately 2.2% for the first quarter, with inflation estimated to be around 4.1%, resulting in a nominal GDP growth rate of 6.25%.

PCE

The Personal Consumption Expenditures (PCE) index is the preferred measure of inflation and wage growth used by the Federal Reserve. Economists polled by Bloomberg are predicting a moderate forecast for the core PCE to show an increase of inflation by 0.3% MoM and 4.5% YoY. The March PCE is anticipated to rise by 0.1% to 4.1% year-over-year, a decrease from the 5.0% reported in February.

Additionally, the Core PCE is expected to rise by 0.3% month-over-month, resulting in a year-over-year increase of 4.5%, down from 4.6% in February.

Investors will monitor the core service closely, excluding the housing sub-index in the PCE report to gauge the underlying consumer inflation trend in the US. As rent-related components have a smaller weight in the core PCE measures than in the core CPI calculation, the core PCE may not benefit as much as the CPI counterpart from the recent rent weaknesses. The headline PCE deflator growth is expected to slow to 0.1% M/M and 4.1% Y/Y in March from 0.3% M/M and 5.0% Y/Y in February.

If the Core PCE does rise by 0.3% for the month, the rate of change for the first three months of the year would be a 4.7% year-over-year increase. These Core PCE numbers are important to the Fed and are based on data from January through March. Whatever improvement was seen at the end of 2022 may be fading.

Despite some believing that inflation is either over or nearing its end, the estimates for the March PCE suggest that inflation is still an issue and that much work is left to be done, even if the results come in as expected.

If the figures exceed expectations, it will further support the case for not only a rate hike in May but also a rate hike in June. The probability of a rate hike in June is currently at 22%, a significant change from just a few weeks ago when rate cuts were anticipated.

Employment Cost Index

Although not as big as PCE and GDP, the Fed has been watching the employment cost index recently, which can move markets as it did during its last two readings, as it is a gauge of inflation related to labor. The Employment cost index will be released on Friday morning. It is anticipated to rise to 1.1% from 1.0% in the fourth quarter.