US GDP in the first quarter may slow down sharply? The Fed's interest rate hike suspense has wavered again

On Thursday, local time, the United States will release the first quarter GDP data. After a brief period of strength at the start of the year, a number of economic indicators began to fluctuate in February, and the US economy was widely expected to slow last quarter. For the Fed, uncertainty about the impact of the banking sector and inflationary pressures have put policy options in a dilemma, with rate hike expectations once again volatile, in suspense or reserved until the last minute.

The economy may slow down more than expected

After two consecutive quarters of short-term downward revisions in the first half of the year, the US economy once rejuvenated in the third and fourth quarters of last year, achieving GDP growth of 3.2% and 2.6% respectively. However, after extending its strong performance in January, factors such as high inflation and interest rate hikes began to hit the consumer side, and economic momentum began to slow. The agency predicts that US GDP growth will slow to 1.2% last quarter.

It is worth noting that there is a possibility that the data will decline more than expected. In its last forecast released on Wednesday, the Atlanta Fed's GDPNow tool has revised GDP growth downward to 1.1 percent, more than half of the previous 2.5 percent.

Towards the end of the quarter, data already shows that consumers and businesses are facing growing headwinds.

Retail sales, the main driver of the US economy, fell 3% m/m in March, the fourth decline in the past five months, and showed further spread in the affected sectors. Consumer confidence has also fluctuated, with both the Conference Board and the University of Michigan surveys showing respondents' concerns about the economy and inflation.

In addition, the manufacturing industry continued to be sluggish, and the New York Fed, Dallas Fed, and Richmond Fed manufacturing indexes continued to be in contraction territory. Excluding cars and aircraft, durable goods orders rose just 3.0 percent in March, with business investment also falling for the fourth time in the past five months. According to a survey released by the National Federation of Independent Business (NFIB), the proportion of small business owners who believe it is more difficult to raise money is the highest since December 3, and the proportion expecting tougher credit conditions in the next three months is also a 2012-year high. "Small business owners are skeptical about the future state of the economy." NFIB chief economist Bill Dunkelberg said in a statement.

The export and real estate sectors are among the few bright spots. The U.S. merchandise trade deficit was $3.846 billion in March, down from $2 billion in February. The housing market showed some signs of bottoming, with new home sales surging 920.3% in March, the highest level since August 9. But these are not enough to stem the pressure of a slowing economy.

Meanwhile, the impact of the Silicon Valley bank bankruptcy may not yet be fully released. Statistics show that overall bank credit in the United States has fallen by about 3.1% since March, and deposits once flowed from small banks to large banks. According to the Fed's Beige Book, several jurisdictions found that banks tightened lending standards at a time when concerns about liquidity were rising.

What is the next step for the Fed

Steen Jacobsen, chief economist of Saxo Bank, said in an interview with the first financial reporter that the signs of the banking crisis were dealt with in an urgent way, but the fundamental problem was not solved. 90% of U.S. banks are not "too big to fail," so he thinks the aftermath of the Silicon Valley bank bankruptcy may still be in its early stages.

After losing more than $1000 billion in deposits in the first quarter, First Republic Bank is once again in a whirlpool. The bank's market value fell below $10 billion on Wednesday, equivalent to 2021.11% of its November 2 peak. According to sources quoted in the media, the US government is reluctant to intervene in the rescue process.

Fed funds rate futures showed that renewed concerns about the banking sector have made the original "set in stone" policy confusing, and the probability of a 5 basis point rate hike in May is expected to fall below 25% at one point. According to Schwab's statistics, this cannot be considered a completely reliable expectation.

Continued price pressures and banking woes will make Fed policy choices more difficult. Jacobson told reporters that he believes inflation will continue to remain sticky in the future, while remaining optimistic about the energy outlook under China's recovery in the second half of the year, so the Fed will not ease until the end of the year, which may make the contradiction between policy and economy more acute.

It is worth mentioning that Fed officials, in their comments before the period of silence, have turned their attention to persistently high inflation and the need to raise interest rates by at least another 25 percentage points. Hiring remains strong, wages are growing faster than the Fed sees as sustainable, and inflation in the services sector remains high, with several committee members, including Fed Governor Waller, suggesting that progress on inflation has "stalled."

Michael Gapen, chief U.S. economist at Bank of America Securities, believes that uncertainty is not enough to make the Fed change its stance. He said that despite the slowdown in inflation, there was still a lot of work to be done to return to the 2 percent target. "We maintained our first rate cut in March 2024. If the pressure on the financial system eases in the short term, we cannot rule out that stronger macro data could lead to further rate hikes by the Fed after May. ”