Another March consumer inflation reading was released, this time without major surprise. Economic activity in 1Q was weaker than projected while April PMI readings decelerated sharply. Wednesday’s Federal Open Market Committee (FOMC) meeting sets up to be rather boring.
March Personal Income and Outlays report from BEA (April 26) noted the headline Personal Consumption Expenditures (PCE) index rising 0.3% in March. Core PCE excluding food and energy also rose 0.3%. With monetary policy restrictive since at least 4Q23, the FOMC has appeared eager to ease if data consistently shows slowing inflation. I have chosen to focus on 6-month annualized consumer inflation trends. The related charts show a strong pick up from the November trough. The next 3 roll months in these calculations sets up a scenario where these charts continue higher over the coming quarter before beginning to fall in July.
The Fed futures curve as observed through the CME FedWatch tool similarly now shows a single 1 quarter point cut in Fed Funds occuring in September this year with the next several meetings having low probability of change in policy rate. With no Summary of Economic Projections update due until June, the most interesting commentary on Wednesday should center on tapering details regarding balance sheet run-off. Remarkably, the Fed has reduced its balance sheet by $1.6T from its peak returning to December 2020 levels.
The backwards looking 1Q24 GDP Advance reading from BEA (April 25) found the economy grew at 1.6% annualized to start the year. This reading was 110 basis points lower than the final GDPNow projection. Nearly half of the gap came from lower consumer expenditures with lower net exports contributing the next largest piece to the miss.
More important to the prospective outlook is the S&P Global April Flash PMI report (April 23) which found the Manufacturing sector again sliding into contraction to start the 2nd quarter. Commentary in the report was overwhelmingly bearish with highlights noting, “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.” Inflation drivers were noted to have switched from labor pressures to commodity inputs as companies cut payroll at a historically high rate.
Finally, as bank earnings wind down, I recap final key metrics from the quarter. While 2/3 of banks beat consensus EPS expectations, sequential EPS continued to decline for the industry highlighted by lower net interest income. Most banks expect NII & NIM inflection over the summer months caveated by a stable economic environment. Qualitatively most banks remain defensively postured maintaining higher liquidity, building reserves and capital, and allowing balance sheet access mostly to those customers who bring deposit relationships to the bank.