WHY DID US Q1 GDP DISAPPOINT THE STREET?
In terms of the impact on the CME Fedwatch during the week, there were two major data points. Let us focus on why the first data point, First advance estimate (FAE) of Q1-2024 GDP did not live up to the mark. At 1.6% GDP growth, the first quarter growth estimate for the US economy was nearly 80 bps lower than the street expectation and a full 120 bps lower than the Atlanta Fed GDP prediction. Also, on a sequential basis, the GDP growth was sharply lower compared to 3.4% in Q4-2023 and 4.9% in Q3. Of course, there are 2 more estimates to come for first quarter GDP, but the underlying trend is unlikely to change drastically. The table below has the break-up of the 1.6% GDP growth for Q1.
GDP Data | Q4-2022 YOY (%) |
Q1-2023 YOY (%) |
Q2-2023 YOY (%) |
Q3-2023 YOY (%) |
Q4-2023 YOY (%) |
Q1-2024 YOY (%) # |
GDP Overall | 2.6 | 2.2 | 2.1 | 4.9 | 3.4 | 1.6 |
GDP – Goods | 6.2 | -1.3 | 0.9 | 7.3 | 2.6 | -2.4 |
GDP-Services | 2.5 | 3.2 | 1.9 | 2.9 | 2.8 | 3.0 |
Structures | -9.6 | 8.9 | 7.7 | 10.0 | 10.4 | 6.5 |
Auto O/P | -1.2 | 14.7 | 15.4 | -7.1 | -21.8 | -6.4 |
GDP Ex-Auto | 2.7 | 1.9 | 1.7 | 5.2 | 4.2 | 1.8 |
Non-farm GVA | 2.8 | 1.8 | 2.0 | 5.8 | 3.8 | 1.3 |
Data Source: US Bureau of Economic Analysis (BEA) - # First Estimates
What triggered the fall in GDP growth to 1.6% in Q1. Let us break it up in to goods and services.
However, the real pressure point on the real GDP came from the higher inflation factor, including core inflation. Between Q4-2023 and Q1-2024, the nominal GDP growth only fell from 5.3% to 4.9%. However, in this period, the spike in the inflation factor led to a much sharper fall in real GDP. That is broadly in sync with the Fed concerns that the inflation monster was far from conquered.
FORGET ABOUT RATE CUTS FOR NOW
Ironically, the first to acknowledge this shift was the CME Fedwatch. It had started about 4 months back with a lot of enthusiasm and optimism that rate cuts would be rapid and front-ended. Nothing of that kind happened. Now, even the CME Fedwatch is reconciled to just about one rate cut in 2024. Even that is now expected to happen around September or even after that. In the recent past, while Powell has played a more diplomatic game, hawks like Christopher Waller and Michelle Bowman had been warning about rushing into rate cuts.
They preferred holding rates higher for a longer period of time. The message seems to be, “Forget about rate cuts.” That is not even the debate now! The CME Fedwatch appears to believe that the first rate cut by the Fed would happen in September, although even that is not certain. However, CME Fedwatch is only factoring 1 rate cut in 2024. In fact, the CME Fedwatch has now turned so conservative that it does not even want to make any serious estimate beyond March 2025. The best case scenario of 3 rate cuts by end of 2025.
RECAP – CME FEDWATCH FOR THE WEEK ENDED APRIL 19, 2024
The week to April 19, 2024 was marked by Fed talk veering towards holding rates higher for longer and that was reflected in the rising US bond yields and the dollar index. CME Fedwatch was betting on just 2 rate cuts in 2024.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
May-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 3.2% | 96.8% |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 0.4% | 16.2% | 83.4% |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | 0.1% | 5.0% | 35.6% | 59.3% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | 0.1% | 2.1% | 17.2% | 45.1% | 35.6% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 0.5% | 5.5% | 23.6% | 42.9% | 27.4% |
Dec-24 | Nil | Nil | Nil | Nil | 0.2% | 2.6% | 13.2% | 31.8% | 36.3% | 15.8% |
Jan-25 | Nil | Nil | Nil | 0.1% | 0.9% | 5.7% | 18.5% | 33.1% | 30.4% | 11.3% |
Mar-25 | Nil | Nil | Nil | 0.4% | 2.9% | 11.0% | 24.5% | 32.0% | 22.6% | 6.6% |
Apr-25 | Nil | Nil | 0.1% | 1.1% | 5.2% | 14.9% | 26.7% | 29.3% | 18.0% | 4.7% |
Jun-25 | Nil | 0.1% | 0.6% | 2.8% | 9.3% | 19.8% | 27.8% | 24.5% | 12.4% | 2.7% |
Data source: CME Fedwatch
There were 3 critical triggers that influenced the CME Fedwatch in the week to April 19, 2024 in terms of key swing factors.
Let us turn to major triggers for the CME Fedwatch in the current week to April 26, 2024.
CUT TO PRESENT: CME FEDWATCH IN WEEK TO APRIL 26, 2024
The latest week to April 26, 2024 saw the CME Fedwatch veering towards just 1 rate cut in 2024; with rather ambivalent probabilities. The big data flows in the week were the first advance estimates of Q1-2024 GDP and the March 2024 PCE inflation update.
Fed Meet | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
May-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 2.4% | 97.6% |
Jun-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 0.2% | 10.8% | 88.9% |
Jul-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 2.6% | 28.6% | 68.7% |
Sep-24 | Nil | Nil | Nil | Nil | Nil | Nil | 1.0% | 12.5% | 43.8% | 42.6% |
Nov-24 | Nil | Nil | Nil | Nil | Nil | 0.2% | 3.6% | 19.6% | 43.6% | 33.0% |
Dec-24 | Nil | Nil | Nil | Nil | 0.1% | 1.5% | 9.8% | 28.8% | 39.5% | 20.2% |
Jan-25 | Nil | Nil | Nil | Nil | 0.5% | 3.9% | 15.3% | 31.9% | 33.9% | 14.4% |
Mar-25 | Nil | Nil | Nil | 0.2% | 1.8% | 8.1% | 21.4% | 32.7% | 26.7% | 9.1% |
Apr-25 | Nil | Nil | 0.1% | 0.6% | 3.5% | 11.7% | 24.5% | 31.1% | 22.0% | 6.6% |
Jun-25 | Nil | Nil | 0.3% | 1.8% | 6.9% | 17.1% | 27.2% | 27.2% | 15.5% | 3.8% |
Data source: CME Fedwatch
There were 3 critical triggers to watch out for in the coming week to April 26, 2024 with reference to CME Fedwatch.
Let us turn to the key triggers for the CME Fedwatch in the coming week to May 03,2024 and how the CME Fedwatch is likely to shape up?
TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO MAY 03, 2024
There are 3 critical triggers to watch out for in the coming week to MAY 03, 2024 with reference to CME Fedwatch.
Let us finally turn to how the CME Fedwatch is now leading the Fed statements in terms of adopting a more hawkish view of the trajectory of interest rates.
CME FEDWATCH NOW PENCILS JUST ONE RATE CUT IN 2024
As of the end of last week, the CME Fedwatch is pencilling in a 60% probability that the Fed would only cut rates by 25 bps in year 2024. Also, the expectation is that the Fed may undertake an experimental rate cut of 25 bps in September and wait after that. With the surge in PCE inflation last week and the sharp fall in real GDP (again due to high inflation), it now seems obvious that rate cuts are off the table for now. The elevated inflation data, rising oil inflation risks from West Asia and the hawkish noises coming from Fed Speak have left a deep impact on Fed rate cut probabilities.
For the time being the FOMC members are willing to wait and watch, rather than jump into rate cuts. Probably, the Fed may have jumped the gun in assuring 3 rate cuts in 2024. That looks increasingly unlikely. The moral of the story is that; FOMC members are in no hurry to cut rates and the CME Fedwatch has already reconciled to the new reality!
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