Impressive GDP and Personal Consumption drive Fed rate hike bets

Watch out Wall Street! The US economy is too strong. The final reading of first quarter GDP and personal consumption reminded traders that the economy is far from breaking and probably will need to be subject to much more Fed tightening. It was a clean sweep of impressive US data as US jobless claims declined the most since 2021 and a holiday shortened week. 

US stocks are holding onto gains despite swap markets starting to price in a second Fed rate hike. The initial reaction saw Treasury yields surge, a strong dollar, while stocks focused on the robust personal consumption numbers.  Good economic news should mean trouble for stocks, but we might not see that until we get a couple more sticky inflation reports. The Fed is nowhere near done and until that gets priced in, stock market rallies should be limited.

FX

The dollar might need to dust off that crown, as the FX market was aggressively pricing an end to Fed tightening after July. The dollar rallied below the 1.09 level against the euro following the data release.   

US Data

The release of US jobless claims was a little delayed, so that allowed traders to first fixate over the extraordinary final GDP and personal consumption data. Q1 GDP was revised from 1.3% to 2.0% and personal consumption rose from 3.8% to 4.2%.  This makes the baseline higher and should significantly raise the risks that the Fed might be too conservative with their dot plots that call for two more quarter point rate rises. 

The consumer is too strong and with a labor market that has too many jobs available, we could start to see the disinflation process struggle here.

Jobless claims fell 26,000 to 239,000, down from an 18-month high and the biggest decline since 2021. The 4-week average rose to 257,500, which is the highest level since November 2021.  Continuing claims dipped, but the insured unemployment rate remained steady at 1.2%

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