A few hours before a meeting of the monetary policy committee (FOMC) of the American Federal Reserve (Fed) without much importance, dollar loans are showing stationary returns after several weeks marked by tensions. Despite a few small surprises, the indicators published last week do not change the data on the problem facing the Fed and investors.
The preliminary estimate of US GDP growth turned out to be a little more modest than expected. Expected to be around 2.5%, annualized GDP growth did not exceed 1.6% during the first quarter. This gap, however, deserves to be put into perspective. Difficult to measure, growth is subject to significant revisions and “annualized” figures amplify the divergence. In this case, the slowdown is essentially the result of a strong increase in imports and a decline in inventory variations. Domestic demand (or final sales) shows an expansion close to 3% in real terms (adjusted for the effects of inflation) and 6% in nominal value (without correction for the effects of inflation).
With an annualized increase of 3.1%, the price index linked to GDP accelerated sharply compared to the rate of 1.6% observed the previous quarter. But this development only confirms what we already knew: inflationary pressures intensified in January and persisted over the following two months. Excluding energy and food, the index attached to consumer spending showed an increase of 0.3% in March compared to the previous month and 2.8% year-on-year – the same rate as in February and barely less than the 2.9% variation observed in December. In short, inflation is too “sticky” to allow a relaxation of monetary policy.
In such a context, the FOMC meeting resembles a formality. There is no doubt that the status quo will be maintained and we should not expect the slightest revelation regarding the trajectory of interest rates. The press release should emphasize the importance of the upcoming data and we will have to wait until June 12 to identify the central bank’s projects. Without waiting for the FOMC deliberations, the market has integrated the prospect of lastingly high interest rates, even if the CME “futures” foreshadow a first reduction in the key rate on November 7, just after the elections.
A confused message
In Europe, euro loans also offer stable returns. Business surveys send a mixed message. The PMIs reflect a decline in manufacturing activity in April, but a strengthening in services. While the IFO business climate index in Germany reflects an improvement, the European Commission survey shows a slight deterioration attributable to the sluggishness of the secondary sector.
The vice-president of the European Central Bank (ECB), Luis de Guidos, confirmed the prospect of a rate cut in June, presented as a “fait accompli” in the absence of unpleasant surprises. In this regard, the latest inflation figures published in Germany and Spain are developing favorably. The central banker, however, was cautious about the continuation of the program, partially dependent on the choices made by the Fed.
In the UK, the Bank of England’s chief economist dampened hopes of a rapid change in course, leading to a rise in sterling yields.
