Strong growth is good news if inflation remains low

The US printed a better-than-expected growth of 3.4%. Sales grew more than expected, the GDP price index fell but fell slower than expected to 1.7%, corporate profits jumped nearly 4% in the Q3 versus less than 1% printed a quarter earlier and consumer sentiment jumped to the highest levels since mid-2021. In other words, the data could hardly be better than this, the stock markets could hardly perform better than this, and the Federal Reserve (Fed) could hardly be more dovish than this given the strength of the data - even though the set of data that was released yesterday was again a warning that the Fed is not in a rush to cut rates to save the economy. The economy doesn’t need the Fed’s help. This is also the message that the Fed’s Waller conveyed this week. The man stated the obvious as he said that the recent economic data deserves delaying rate cuts and reducing the number of them, and that he wants to see ‘at least a couple of months of better inflation data’ before easing. But this is not what the majority of Fed members think. They think on the contrary that three rate cuts would be suitable for this year.

As such, yesterday’s better-than-expected GDP pill went down the market’s throat quite smoothly, as Waller’s hawkish remarks were mostly washed away by the soft-landing bets and bets that the Fed will – in all cases – cut rates into summer if it doesn’t want to take the centerstage in the US political turmoil into the November election. In this context, if inflation doesn’t get meaningfully ugly, the rate cut should arrive by June or July. On this belief, we saw the S&P500 gain after a strong GDP data yesterday. The index advanced to a fresh record, Nasdaq however closed slightly lower. The dollar index extended gains. The EURUSD fell to 1.0775, turning the medium term outlook from bullish to neutral, and Cable remained offered near its 100-DMA, as, in contrast to the strong American growth, this week’s  numbers confirmed that the UK ended last year in a recession. The contraction in the second half was slightly smaller than expected, but economic troubles and the cost-of-living crisis were real. The data backed the dovish BoE expectations and should keep sterling offered into the 100-DMA, near 1.2655, against a broadly stronger US dollar – as the US dollar bulls defy the dovish Fed expectations faced with data unideal for rate cuts.

Today, most exchanges around the developed world will be closed due to Good Friday holiday, but the US will print its latest core PCE figure – which is the Fed’s favourite inflation metric. A hotter-than-expected inflation report could further back the USD bulls, and – maybe - temper the dovish Fed expectations provided that a good growth number is good news as long as inflation remains low. If inflation shows signs of picking up, it suddenly becomes bad news.