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Breakfast Bites - US PCE Inflation on the cards

Microsoft & Google improve market sentiment; BOJ increases inflation forecast; US GDP comes in lower; Korean GDP comes in higher

Rise and shine everyone and Happy Friday!

US Equity Futures are trading higher this morning after Microsoft and Google delivered earnings that erased the dip from the US GDP release and Meta’s crash on earnings.

Today’s big event is the US PCE Inflation data that the markets are expecting to see come in hotter. The release is at 8:30 am ET. The quarterly PCE Data that came out of the US GDP Advance Estimate certainly showed higher readings and coupled with a stronger CPI reading over the last three months, the markets are expecting a higher number.

The BoJ meeting earlier this morning did nothing to dampen spirits either. While they did increase their inflation forecasts (a hawkish move), they did not hike nor, make changes to their bond buying. The market perceived this as dovish and the USD/JPY crossed 156 for the first time since 1990, while the Nikkei closed +0.8%. Asian markets across the board were upbeat.

There’s been some speculation of intervention on the Yen but no announcements made as yet.


The word “stagflation” is being revived across the markets as the first estimate of US GDP Q1 came in at 1.6% QoQ, well below expectations of 2.5% QoQ. It should come as no surprise that growth is slowing but, as we said above, the quarterly PCE reading came in hotter so we’re looking at a situation of higher inflation and slower growth.

Stagflation is a condition in which slow economic growth (stagnation), rising prices (inflation), and rising unemployment all happen at the same time.

We still need the third leg of unemployment to play out.

PCE Preview

Consensus still expects the PCE to trend lower and this may not altogether be wrong. The gap between the PCE and the CPI has been widening, with the PCE running cooler than its CPI counterpart.

There are several reasons but those that are important for recent analysis are:

  • CPI has a higher weighting in Housing, Energy, Food, and Motor Vehicles. PCE has a higher weighting in Core Goods, Medical Services, and Other Core Services. All the mentioned CPI items have been running hotter while core goods have seen some deflation.

  • Insurance calculations are taken as premiums paid for CPI. For the PCE, insurance claims are subtracted from the insurance premiums paid. So, it’s obvious that the number will be lower for the PCE calculation.

  • Finally, studies show that PCE measures consumer substitution better. So as consumers trade down to cheaper (maybe, white-label) goods, the PCE moves lower more quickly than the CPI.

Korea’s Strong GDP Growth Keeps the Markets Going

Korea's real GDP grew by 1.3% in Q1 2024, a significant increase from 0.6% in the previous quarters and the highest since Q4 2021. This growth, which exceeded expectations, was driven by a 0.7pp rise in domestic demand, supported by boosts in construction and consumption, and a steady 0.6pp contribution from net exports for the fourth quarter in a row.

The Kospi closed higher +1% today.

Chart of the Day

The top 10 stocks of the S&P 500 still command a record level of 34% of the index’s market cap.

BofA’s Flow Show

  • The TCMB kept its policy rate unchanged at 50.00%, in line with consensus. This came after a surprise hike during the previous meeting to control inflation after analysts were almost certain that the hiking cycle was over.

  • Japan’s Tokyo CPI (which leads national figures with a high correlation) came in significantly lower than estimates and with all 3 readings below the BOJ target of 2.0%.

  • Lithium price drop drove Australian export prices down, with Crude fertilizers and minerals -58.1%. Aussie Stats Agency added that Lithium declined in the quarter due to excess global supply and slower EV adoption.

  • China 10-year bond yield differential v UST at widest level since Jun 2002. The 1.99% government bond was halted earlier today due to a drastic price rise.


(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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