There are two key data points expected to be released from the US this week which are likely to dominate markets: GDP and PCE. In fact, trading in the first half of the week could be muted in anticipation for what will happen. Both are key components for trying to figure out what the Fed will do later this year, and that in turn affects how the dollar behaves.
Of course the more immediate concern is whether the recent uptick that has been seen in headline inflation will be maintained. That would likely force the Fed to keep rates higher irrespective of the other figures. But it’s generally understood that economic activity drives inflation, so if the US economy remains strong, that would also be seen as keeping up the odds of higher rates.
Breaking the Trend
The Congress on the weekend passed a much anticipated $100 billion aid package for several US allies and other ancillary expenditures. As those touting the benefits of the bill said, virtually all of that spending will be in the US, primarily in the form of defense procurement. This is spending that is on top of the current authorizations, meaning that an additional $100 billion will be entering the economy in the short term.
Increased deficit spending is seen as the main culprit for the latest bout of inflation, so naturally an increase in debt would be expected to be pro-inflationary. But given the size of the Federal deficit, this new spending package is less than 10% of the current deficit spending. In other words, a relatively small impulse to inflation and growth to GDP.
What the Data Says
Later today is the release of US durable goods, which is often tracked as a sign of economic health. But the market seems to have become convinced that there will be no recession, and it’s just a matter of how strong the upswing will be. Therefore, the 2.5% increase in durable goods is likely only to get attention if the result is well away from expectations.
Focus will likely concentrate first on Thursday with the release of the first look at US Q1 GDP. The US economy is expected to slow down a bit, with an annualized growth rate of 2.3% compared to 3.4% prior. It would be the third straight quarter of slowing growth, but would still be above the average for the last five years, and likely to reassure markets.
Lining Up the Fed’s Cut
A miss on the GDP figures might bring back hopes that the Fed will cut rates, as it would imply that the normal economic growth pressure on prices would be less. So far, corporate earnings have not been stellar, and the mixed bag has led to expectations that the economy will be growing slower than anticipated.
The hopes for action from the FOMC are pinned on Friday’s release of the PCE Price index, which is the Fed’s preferred measure of inflation. Lately, it has continued to trend lower despite the headline CPI figure drifting higher, which could keep intact the expectations for easing later in the year. Core PCE is expected to remain unchanged on a monthly basis at 0.3%, but the annual rate would continue to tick lower to 2.7% from 2.8% prior.
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