US Q1 Growth Rate Falls Short of Expectations, Inflation Surges... 2-Year Treasury Yield Surpasses 5%

Q1 GDP Growth Rate 1.6% 'Below Expectations'
Core PCE Inflation Up 3.7%...Exceeds Forecast
US Treasury Yields Surge on Delayed Fed Rate Cut Outlook

The US economy's growth rate in the first quarter of this year slowed down more than expected, but inflation accelerated. Despite the cumulative high-intensity tightening by the US Federal Reserve (Fed) cooling the economy, prices have increased at a faster pace, raising concerns about 'stagflation' (rising prices amid economic slowdown). Expectations that the central bank's interest rate cuts will be delayed due to hot inflation have gained more weight, pushing the yield on the 2-year US Treasury bond above 5%.

[Image source=Reuters Yonhap News]

According to the US Bureau of Economic Analysis (BEA) on the 24th (local time), the preliminary estimate of the real Gross Domestic Product (GDP) growth rate for the first quarter was 1.6% annualized compared to the previous quarter.

This is not only a significant slowdown from the revised 3.9% growth rate in the fourth quarter of last year but also well below expert forecasts. Earlier, Bloomberg predicted a 2.5% GDP growth rate for the first quarter, while The Wall Street Journal (WSJ) and Dow Jones expected 2.4%.

The growth rate declined as consumer and government spending slowed. Consumer spending, which accounts for two-thirds of the US economy, increased by 2.5% in the first quarter, falling short of market expectations of 3%. This is interpreted as a sign that the US economy is contracting as the Fed maintains the benchmark interest rate at the highest level in 23 years, between 5.25% and 5.5% annually.

On the other hand, inflation remains hot despite the high-intensity tightening. The core Personal Consumption Expenditures (PCE) price index, excluding food and energy, rose 3.7% in the first quarter, exceeding the expected 3.4%. Inflation in the services sector, excluding housing and energy, increased by 5.1%, doubling the rate compared to the previous quarter. The March PCE price index will be announced the following day.

Concerns over persistent inflation have strengthened expectations that interest rate cuts will be delayed, causing bond yields to rise.

The 10-year US Treasury yield, a global benchmark for bond yields, rose 7 basis points (1bp = 0.01 percentage points) from the previous trading day to 4.72%, marking the highest level since November 2 of last year (intraday 4.749%). The 2-year Treasury yield, sensitive to monetary policy, increased by 6 basis points, surpassing 5%.

Ahead of the New York Stock Exchange opening, US stock index futures are all falling more than 1%.