It’s time to shift the focus back to growth

The market reaction to today’s US GDP report was instructive.

At first, the market freaked out because the high inflation numbers in the report imply an upside surprise in Friday’s US PCE data. However as the day wore on, that faded and equities recouped a large portion of the gains, excluding some of the tech-inspired META selling.

With Fed cuts priced out until at least July 31, I don’t think the March or April inflation matters much. What will start to matter more and more is what happens with pricing later in the year and that’s where growth comes in. Today’s Q1 GDP data was soft at 1.6% versus 2.4% expected. Some of that is one-off quirks like inventories but the path towards lower growth is increasingly clear.

It’s also clear to me that inflation will follow it, though the timing is tough to pin down. Employment isn’t a leading indicator but Ian Shepherdson at Pantheon makes a compelling argument that it’s softer under the surface than it looks.

“I’ve been worried for a while that the weakening NFIB small business survey points to much slower job gains from Q2 onwards,” he writes. “Now, the S&P PMI employment index tells the same story; it’s more of a coincident indicator, while the NFIB leads by about 4 months. Look out below.”

Tomorrow the focus will undoubtedly remain on inflation with the PCE data but don’t forget that we saw an outsized move earlier this week on a soft US services PMI from S&P Global.

This article was written by Adam Button at