Economic Update for April 24, 2024-Inflation, Interest Rates, Forecast from a Leading Banker and more

From the Financial Times-US to grow at double the rate of G7 peers this year, says IMF. The US is on track to grow at double the rate of any other G7 country this year, according to IMF forecasts, as the strength of the world’s biggest economy rocks global markets.

Fund also upgrades inflation forecasts as strong demand and tight labour market delay possible Fed rate cuts

IMF chief economist Pierre-Olivier Gourinchas said US rate cuts could be delayed until after November’s presidential election if inflation overshot expectations 

The US is on track to grow at double the rate of any other G7 country this year, according to IMF forecasts, as the strength of the world’s biggest economy rocks international markets.

Strong household spending and investment will help propel US growth to 2.7 per cent this year according to the fund’s latest World Economic Outlook.

The figure is higher than the 2.5 per cent estimated for 2023 and represents a 0.6 percentage point upgrade on the previous forecast.

The projections highlight the US economy’s role as the driver of global growth, as investors across the world scale back their expectations for Federal Reserve interest rate cuts.

The IMF said the next best performer in the G7 this year would be Canada, with growth of 1.2 per cent.

It added that Germany’s expansion would be the weakest among the G7 at 0.2 per cent. Japan is forecast to experience growth of 0.9 per cent, while the UK is set to expand by just 0.5 per cent after flatlining in 2023. 

Dollar notches up strongest week since 2022. The dollar has notched up its strongest weekly performance since 2022, pushing the euro and sterling to their lowest levels for months after outsize US inflation figures caused ripples through world markets.

China’s GDP jumps 5.3% in first quarter, beating forecasts. China’s gross domestic product grew 5.3 per cent in the first quarter against a year earlier, exceeding market expectations as Beijing tries to steer a manufacturing-led revival of the world’s second-largest economy. 
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From the New York Times: Inflation Was Hotter Than Expected in March, Unwelcome News for the Fed-The surprisingly stubborn reading raised doubts about when — and even whether — the Federal Reserve will be able to start cutting interest rates this year.

A closely watched measure of inflation remained stronger than expected in March, worrying news for Federal Reserve officials who have become increasingly concerned that their progress on lowering price increases might be stalling.

The surprisingly stubborn inflation reading raised doubts among economists about when — and even whether — the Fed will be able to start cutting interest rates this year.

The Consumer Price Index climbed 3.8 percent on an annual basis after stripping out food and fuel prices, which economists do in order to get a better sense of the underlying inflation trend. That “core” index was stronger than the 3.7 percent increase economists had expected, and unchanged from 3.8 percent in February. The monthly reading was also stronger than what economists had forecast.

Counting in food and fuel, the inflation measure climbed 3.5 percent in March from a year earlier, up from 3.2 percent in February and faster than what economists anticipated. A rise in gas prices contributed to that inflation number.

This week’s inflation figures come at a critical juncture for the Fed. Central bankers have been hoping to confirm that warmer-than-expected inflation figures at the start of the year were just a seasonal quirk, not evidence that inflation is getting stuck well above the 2 percent target. Wednesday’s report offers little comfort that the quick early 2024 readings have not lasted.

Policymakers have made it clear in recent months that they want to see further evidence that inflation is cooling before they cut interest rates. Fed officials raised borrowing costs to 5.3 percent in 2022 and mid-2023, which they think is high enough to meaningfully weigh on the economy. Central bankers forecast in March that they would cut interest rates three times this year.

But Fed officials do not want to cut rates before they are confident inflation is on track to return to normal. Lowering borrowing costs too early or too much would risk allowing price increases to pick back up. And if households and businesses come to expect inflation to remain slightly higher, officials worry that could make it even harder to stamp out down the road.

That threat of lingering inflation has become a more serious concern for policymakers since the start of the year. Inflation flatlined in January and February after months of steady declines, raising some alarm at the Fed and among forecasters. Going into the year, investors expected the Fed to cut rates sharply in 2024 — perhaps five or six times, to about 4 percent — but have steadily dialed back those expectations.

Stocks dropped sharply after the inflation release as investors further pared back their expectations for lower rates. Following the report, market pricing suggested that many investors now expect just one or two cuts his year.

The S&P 500 and the tech-heavy Nasdaq composite each closed nearly 1 percent lower on Wednesday. The Russell 2000 index, which tracks smaller companies, was down nearly 3 percent.

Investors would like to see lower interest rates, which tend to bolster prices for assets like stocks. But the Fed might struggle to explain why it is cutting rates at the current moment: Not only is inflation showing signs of getting stuck well above the central bank’s target, but the economy is growing at a fairly rapid pace and employers are hiring at a robust clip.

In short, the Fed’s policies do not appear to have pushed America to the brink of a recession — and in fact, there are signs that they may not be having as much of an effect as policymakers had expected when it comes to growth.

While the Fed officially targets Personal Consumption Expenditures inflation, a separate measure, the Consumer Price Index report released on Wednesday comes out earlier and includes data that feeds into the other metric. That makes it a closely watched signal of how price pressures are shaping up.

From the Financial Times: European Central Bank keeps interest rates on hold at 4%-The European Central Bank has held interest rates at all-time highs but signalled it was considering a cut at its next meeting in June.

From the LA Times: JPMorgan chief expects U.S. economy to grow-But Jamie Dimon also worries about inflation, wars and political polarization. By Ken Sweet for the Associated Press

The nation’s most influential banker, JPMorgan Chase Chief Executive Jamie Dimon, told investors Monday that he continues to expect the U.S. economy to be resilient and grow this year.

But he worries geopolitical events, including the war in Ukraine and the Israel-Hamas war, as well as U.S. political polarization, might be creating an environment that “may very well be creating risks that could eclipse anything since World War II.”

The comments came in an annual shareholder letter from Dimon, who often uses the letter to weigh in on broad topics such as politics, regulation and global events and what it might mean to JPMorgan Chase, as well as the broader economy.

Dimon also used his letter to forcefully defend the bank’s diversity and equality efforts, pushing back on the arguments from Republicans who have said such efforts at Fortune 500 companies, colleges and universities are discriminatory and promote left-wing ideology.

“America’s global leadership role is being challenged outside by other nations and inside by our polarized electorate,” Dimon said. “We need to find ways to put aside our differences and work in partnership with other Western nations in the name of democracy. During this time of great crises, uniting to protect our essential freedoms, including free enterprise, is paramount.”

Dimon had particular concerns with continued large amounts of deficit spending by the U.S. government and other countries, as well as the need for countries such as the U.S. to remilitarize and continue to build out green infrastructure, all of which will probably keep inflation higher than investors expect.

Because of these issues, Dimon said he is less optimistic that the U.S. economy will achieve a “soft landing,” which he defined as modest growth along with declining inflation and interest rates, compared with the broader market. Although he says investors are pricing in a “70% to 80%” chance of a soft landing, Dimon thinks the chances of such an ideal outcome are “a lot less” than that.

Also, at a time when some investors and economists are questioning whether the Federal Reserve can make good on its projection for three interest rate cuts this year, Dimon warned of the possibility of rates rising to 8% or higher. The Fed’s benchmark rate is in a range of 5.25% to 5.50%.

“These significant and somewhat unprecedented forces cause us to remain cautious,” he said.

As he has done in previous letters, Dimon said he continues to believe that the U.S. must take a significant leadership position in the world through trade, military might and a resilient economy backed by strong infrastructure spending. He has long argued that the U.S. must continue to hold its leadership role in the West, or it will eventually cede that role to China as an authoritarian superpower. This includes continuing to support Ukraine in its war against Russia, Dimon argued.

CFOs Optimistic: about one-third of finance leaders responding to Grant Thornton’s CFO survey for the first quarter of 2024 say they are very optimistic about the U.S. economy — and they’re poised to take advantage of the opportunities at hand. 

“The expectation that the Fed may lower interest rates continues to have a positive effect.” - Jim Wittmer

The 34% “very optimistic” mark is an 11-quarter high in the survey, and the 12% who are pessimistic ties an 11-quarter low. Meanwhile, the survey of 273 senior U.S. finance leaders from across the industry spectrum continues to show their strong confidence in meeting their labor needs, satisfying increased demand, and controlling costs.

On a recent day in Grant Thornton’s New York office, firm National Managing Partner for Tax Growth Jim Wittmer looked at his calendar and saw four different calls related to potential M&A transactions. That one-day snapshot was a reflection of the optimism displayed in the CFO survey as well as a recent Grant Thornton M&A pulse survey that showed that 81% of dealmakers projected an increase in transaction volume over the next six months.

Together, this data suggests that the time to make a deal, to grow, and to be bold may be at hand.

“The expectation that the Fed may lower interest rates continues to have a positive effect on some of our clients, and obviously that’s good from the perspective of the overall economic outlook,” Wittmer said. “The confidence reflected in the CFO survey is very consistent with the client and prospect interactions we’re having right now.”

Even as optimism about the economy continues to soar, cost optimization remains the top area of focus for CFOs, as they expect their spending on operations to increase. To continue controlling costs, CFOs are turning to automation, data analytics and AI to build efficiency. 

“You may be able to reduce the interest rate associated with your debt if you close faster and get your lenders that data sooner.” -Mike Hennessey-Grant Thornton Principal, CFO Advisory

The survey also shows that:

  •    The portion of respondents using generative AI is at an all-time high (47%), and it’s possible that this is related to a jump of 10 percentage points in the portion of CFOs who say they expect their cybersecurity costs to increase.
       Finance leaders’ confidence in meeting their supply chain needs dropped 11 percentage points compared with the previous quarter, perhaps as a result of the shipping turmoil related to Houthi attacks in the Red Sea.
       The 71% of CFOs who predicted that their net profits would grow over the next 12 months was a slight drop from 76% in each of the two previous quarters, but still represented strong economic confidence.


Meanwhile, a section of survey questions related to the monthly close showed that 85% of finance leaders said their close processes were at least fairly mature and sufficient. However, they still express a desire for additional resources, especially technology, to improve their close.