US GDP surprises on the upside in Q4 2023

US GDP rose by a much faster than expected 3.3% annualized in Q4 2023, according to the advance print. While this marked a slow down from Q3’s 4.9%, it was well above the median forecast of 2.0% growth in the final quarter. Personal consumption growth slowed to a still strong 2.8% in Q4 from 3.1% in Q3. Government consumption and private investment also slowed from Q3 but remained solid. The main driver of the upside surprise was net trade, with export growth accelerating to 6.3% annualized while import growth slowed to 1.9%. Full year GDP growth in the US last year was 2.5%, up from 1.9% in 2022, and is expected to slow to 1.3% in 2024.

More important for the monetary policy outlook was the core PCE deflator, which came in in-line with expectations at 2.0% in Q4, unchanged from Q3. While this is consistent with the Fed’s inflation target, it does suggest the pace of disinflation may be slowing. The market is now pricing a more than 50% probability of a rate cut in March, higher than before the GDP print.

The ECB kept rates on hold as expected yesterday, but the tone of the post-meeting commentary was that the ECB was more dovish than in previous meetings. While Christine Lagarde continued to stress that the ECB would be data dependent in its decision making, and that it would be “premature” to discuss rate cuts, the ECB indicated that the balance of risks around inflation were shifting to the downside. Inflation data next week will be closely watched.

Germany’s IFO business climate index unexpectedly declined to 85.2 from (a downwardly revised) 86.3 in December and indicated that the German economy continued to stagnate at the start of 2024. Both the current assessment and expectations components weakened, which was broadly consistent with PMI data released earlier this week showing contractions in both manufacturing and services sectors in January.

Turkey’s central bank raised the benchmark 1 week repo rate by 250bp to 45% as expected. The statement indicated that rates have likely peaked but would be maintained “until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range.” The central bank expects inflation to fall to peak around 75% before easing to 36% by year-end. Updated forecasts are expected in February.

Today’s Economic Data and Events

17:30 US personal income (Dec) forecast 0.3% m/m, previously 0.4% m/m

17:30 US personal spending (Dec) forecast 0.5% m/m previously 0.2% m/m

19:00 US pending home sales (Dec) forecast 2.0% m/m, previously 0.0% m/m

Fixed Income

• Treasury yields declined across the board yesterday although the curve continued to steepen. 2y Treasury yields declined -9bp to 4.29% after Q4 GDP data showed the core PCE deflator in line with the Fed’s 2% target for a second consecutive quarter. The 10y yield fell -6bp to 4.12% while 30y treasury yields declined -4bp.
• Benchmark 10y yields fell across the board in Europe yesterday after dovish ECB commentary. The biggest movers were the peripherals Greece, Italy, and Portugal. Bund yields fell -5bp to 2.3% while Gilts declined -3bp to 3.98%.

FX

• EUR lost -0.1% against the dollar yesterday and is trading -0.4% weaker this morning as the market reprices rate cuts from the ECB after relatively dovish post-meeting commentary. A 25bp rate cut is now almost fully priced in April, which weighed on the euro.
• The commodity currencies all weakened yesterday but have gained some ground this morning with CAD gaining 0.3% and AUD up 0.1% as of this writing.

Equities

• US equities rallied to close at new highs on Thursday with the DJIA up 0.6%, the S&P500 up 0.5% and the Nasdaq100 up 0.1%. European stocks also closed in the green yesterday with Eurostoxx50 up 0.4% and smaller gains across the major European markets.
• Local markets closed lower on Thursday with the DFM down -0.2%, the ADXGI down -0.3% and the Tadawul ASI down -0.1%.

Commodities

• Brent and WTI both closed 3% higher on Thursday putting oil on track for the biggest weekly gain since October. Lower US crude stockpiles (largely due to poor weather), the prospect of greater stimulus from China and elevated geopolitical tension in the Middle East have been the main factors behind the rise in oil prices this week, but better than expected growth data from the US and the prospect of earlier monetary policy easing in Europe have also likely contributed to the improved sentiment.