Markets chopped to the slew of data releases with contracting US GDP initially hitting equities and bonds, but the move faded to see T-notes settle flat while stocks closed green (ex-Russell). The GDP report was soft and accompanied by rising Core PCE Prices, boosting stagflationary concerns. T-notes tumbled in response, particularly the long-end but Treasuries recovered those losses by settlement. Equity futures also tumbled on the report but pared throughout the session, with buying accelerating into the US cash close on month-end flows. Meanwhile, the ADP employment report was woeful ahead of NFP on Friday, Chicago PMI disappointed ahead of the ISM Manufacturing PMI on Thursday, and the March PCE was mixed overall but with upward revisions. The slew of soft data adds to the weak data seen earlier in the week (falling consumer confidence, falling JOLTS and rising trade deficits), ahead of ISM Manufacturing PMI on Thursday and NFP on Friday. In FX, the Canadian Dollar outperformed on trade talk hopes between Carney and Trump, while the Australian Dollar was buoyed by hotter-than-expected Q1 inflation in Australia. The Dollar was bid on month end after seeing sharp losses in April, while the Pound, Euro and Yen underperformed on the Dollar strength; eyes turn to the BoJ overnight. Crude prices were lower, primarily on reports via Reuters that Saudi Arabia has been telling allies and contacts that the Kingdom can withstand prolonged periods of lower oil prices. On trade, China press reported the US has reached out to China for trade talks, which briefly lifted equities, weighed on bonds and supported crude, but the move was short-lived and ultimately did little to change the overall direction of trade. Elsewhere, earnings are in focus with META, MSFT and QCOM due after-hours, with AAPL and AMZN due on Thursday. The advance GDP print for Q1 saw growth contract by 0.3%, a touch beneath the Bloomberg consensus of -0.2%, although not as sharp as the Atlanta Fed gold adjusted model that was looking for a decline of 1.5%. The decline in growth in Q1 was primarily due to an increase in imports (a subtraction in the GDP calculation) and a decrease in government spending. These were partially offset by increases in investment, consumer spending, and exports. Consumer spending rose 1.8%, slowing from the prior 4.0%. Meanwhile, the Core PCE Prices rose 3.5% y/y, above the 3.3% consensus and 2.6% prior. Overall, slowing growth and rising prices raise stagflationary fears. That said, this data does not yet fully incorporate the impact of tariffs. Albeit, some tariff impact can be seen given that the primary driver for the decline in growth was the surge in imports as firms looked to front-run the US tariffs implemented on April 2nd. Nonetheless, ING suggests the stagflation narrative is likely to continue to dominate the economic debate, putting the Fed in a sticky situation. US employment costs were unchanged at +0.9%, and in line with the expected, while Y/Y was +3.6%, down from a Y/Y gain of 3.8% in Q4 of 2024. Wages printed 0.8% Q/Q (prev. 1.0%) and 3.5% Y/Y, the slowest annual gain since Q2 2021. Wages and salaries for private sector workers were up 3.4% Y/Y, while wages and salaries for state and local government workers were up 4.1% Y/Y. On the headline, Oxford Economics notes that the relatively tame reading is more noteworthy since residual seasonality tends to lend an upward bias in the first quarter of the year. In addition, the consultancy adds that the latest ECI metrics, which they considered to be one of the better measures of wage growth, confirms that after surging following the pandemic, wage growth is well aligned with the Fed’s inflation target of 2%. Overall, OxEco adds the good news is that wage growth is now well aligned with the Fed’s inflation target and not a source of inflationary pressures. The not-so-good news is that inflation will rise this year due to tariffs, and as a result, expect the Fed to delay any rate cuts until late this year. ADP national employment plunged to 62k in April from 147k in March (exp. 115k), printing outside the bottom end of the forecast range, and ahead of the monthly payrolls report on Friday. In terms of median change in annual pay, job stayers ticked marginally lower to 4.5% (prev. 4.6%), while job-changers rose to 6.9% from 6.7% in March. ADP Chief Economist Nella Richardson said, “Unease is the word of the day. Employers are trying to reconcile policy and consumer uncertainty with a run of mostly positive economic data. It can be difficult to make hiring decisions in such an environment”. Pending home sales for March rose 6.1%, much above the forecasted rise of 1.0%, and the prior 2.1%. The Northeast experienced M/M losses in transactions, while the Midwest, South, and West saw gains, which were most substantial in the South. According to NAR Chief Economist Lawrence Yun, “Home buyers are acutely sensitive to even minor fluctuations in mortgage rates. While contract signings are not a guarantee of eventual closings, the solid rise in pending home sales implies a sizable build-up of potential home buyers, fuelled by ongoing job growth”. Nonetheless, Pantheon Macroeconomics suggests that a meaningful further recovery seems ruled out by the still very elevated level of mortgage rates. PM notes any boost to housing demand from here from lower long-term rates is likely to come at the expense of a hit to demand from slower economic activity and a weaker labour market.
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