The Bureau of Economic Analysis said Friday that first-quarter GDP expanded by 3.2%, the best start to a year since 2015 and well ahead of economist expectations for 2.5% growth. While the stronger-than-anticipated headline number initially spent stock futures and yields higher, both reversed course as investors analyzed dug into the report.
At around 9:53 a.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was lower at around 2.502%, while the yield on the 30-year Treasury bond was also lower at 2.922%. The 2-year note yield traded at 2.28%.
The initial rosy sentiment about an uptick in net exports, for example, retreated after traders realized that the rise was due in large part thanks to a contraction in imports. While a decline in imports to the U.S. tends buoys raw GDP numbers, it can also reveal a deceleration in American spending in general as consumers curb purchases of oversees goods.
“Certainly the headline number looks quite strong ... [but] it was the second-weakest quarter for household spending in the last 5 years,” said Jon Hill, a fixed-income strategist at BMO Capital Markets. “What is driving the GDP is much more an inventory build and improvement in net exports though that’s a bit more ominous with a decrease in imports.”
“You add that to the disappointing inflation data, this keeps the Fed on pause longer and reinforces elements of Fed rate cut,” Hill added.
Meanwhile, the Federal Reserve’s preferred inflation measure dipped compared to the prior quarter. The price index for personal consumption expenditures increased 0.6% in the first quarter compared to 1.5% in the fourth quarter of 2018.
Anemic price pressure can be problematic for the Fed, as some members of the central bank hope to resume hiking its benchmark lending rate. The central bank tries to keep inflation at 2%, a level they believe represents healthy price growth in the American economy.