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US Inflation Remains Elevated As US GDP Price Index Showed

Today the US GDP for Q1 came below expectations but the USD jumped higher intially. That’s because the GDP price index was quite high, increasing compared to the Q4 of 2023 and beating expectations too. With the market being totally fociused on rate cuts, the inflation numbers took a higher importance. Besides that, the GDP report wasn’t too bad either, as Janet Yellen confirmed.

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US Treasury Secretary Yellen Speech Key Points

US Treasury Secretary Yellen Joins Fed Officials
  1. GDP data shows strength in consumer investment spending, indicating robust growth across the US economy.
  2. Yellen acknowledges the possibility of revisions to GDP data but sees considerable strength in the underlying core drivers of economic activity.
  3. She believes the US economy is on a downward path for inflation, noting stabilization in rents but acknowledges that some people are still experiencing upward adjustments in housing costs.
  4. Yellen does not view wage pressures as a significant source of inflation and does not see the economy as overheated.
  5. She emphasizes the importance of setting monetary policy to be consistent with price stability, with the Fed prioritizing evidence of a sustainable decline in inflation.
  6. Yellen highlights concerns about the high cost of living and identifies healthcare costs and drug prices as top priorities for the Biden administration.
  7. Regarding the US dollar, Yellen notes its strength and attributes it to the strength of the US economy and interest rate levels.
  8. She expresses cautiousness about currency intervention, stating it should only occur in rare and exceptional circumstances.
  9. Yellen stresses the importance of a sustainable fiscal path and mentions enacted deficit reduction measures despite divisions in Congress.
  10. Regarding China, Yellen criticizes its low consumer spending and its reliance on exports for full employment, highlighting the negative impact on manufacturing jobs in the US.
  11. She acknowledges that some parts of the US have been left behind by free trade and emphasizes the need for trade policies that benefit all regions of the country.
  12. Yellen indicates a willingness to sanction Chinese banks if necessary, signaling a firm stance on addressing issues related to China’s economic practices.

 FED Rate Cut Odds Fall

Before today’s US GDP report, the market had priced in a 41 basis points reduction in Federal Reserve rates. However, following the report, this expectation decreased to 35 basis points. The likelihood of a rate cut in July dropped from approximately 50/50 to 34%, and a cut is not even fully priced for November.

These changes are primarily related to the inflation reading in the report. The PCE deflator came in at 3.1%, exceeding the projected 3.0%, while the Core PCE reached 3.7% compared to the expected 3.4%. This outsized reaction to the inflation data is significant because the March PCE report is scheduled for release tomorrow. Investors are anticipating an upward surprise in these numbers, which could lead to a ‘sell the fact’ type of reaction when the data is revealed tomorrow.

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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