The big shift in the US economic backdrop
Growth, inflation, and unemployment are all sending the same message.
For the past year, the US macro backdrop — the mix of growth, unemployment, and inflation data — has been sending mixed signals.
During the second half of last year, economic growth was accelerating, the unemployment rate moved largely sideways (up a tick!), and inflation was decelerating sharply.
In the first quarter of 2024, the unemployment rate kept creeping higher, growth moderated — but inflation was re-accelerating.
The second quarter of 2024 appears to be the first time since the Fed delivered its last interest rate hike in July that all of these variables are sending the same message.
There’s a marked downshift in growth relative to the second half of last year, while the unemployment rate is up 40 basis points since June 2023.
And core PCE inflation — which hit 4.4% on a three-month annualized basis in March — moderated in April and is poised to continue doing so for at least another month.
After Thursday’s May producer price inflation report (on the heels of Wednesday’s soft CPI inflation data), a handful of inflation analysts are suggesting that core PCE inflation could rise just 10 basis points or less month-on-month in May. If we pencil in that reading, we’d see core PCE inflation decelerate to just 2.8% on a three-month annualized basis.
The crucial variables that underpin the dual mandate goals of the Fed — full employment and price stability — are increasingly giving the US central bank cover to move towards lowering policy rates to stabilize the economy. And that’s a big reason why 10-year and 2-year US Treasury yields are down more than 15 basis points so far this week.
