Investors are more concerned about inflation than a weak economy

The US economy slowed in the first three months of the year, according to new data. But for investors, inflation rose faster than Wall Street expected, sending shockwaves through markets on Thursday.

The Latest data The Bureau of Economic Analysis showed the „core” personal consumption expenditures (PCE) index, which excludes volatile food and energy categories, grew 3.7% year-over-year in the first quarter, above estimates of 3.4%, and significantly higher than the 2% gain seen in the previous quarter.

It marked the first quarterly increase in the central bank's preferred inflation measure in a year, underscoring concerns that the central bank may not cut interest rates as quickly as predicted.

Markets' losses, fueled by disappointing earnings from the Meta on Wednesday, accelerated following the BEA. Report. All three major indexes were down more than 1% in the afternoon At the same time bond yields rose. The 10-year Treasury yield ( ^TNX ), stocks' latest intervention, rose above 4.7% for the first time since early November.

“The hard part [of Thursday’s data release] The key PCE inflation axis for the Fed and the markets,” Deutsche Bank Senior US Economist Brett Ryan told Yahoo Finance. „That's what's really troubling from the Fed's perspective, and you know why the market reacted negatively. Because that really puts the Fed in a bad position, and you start to question whether they can taper this year.”

He said the data could have implications for a separate inflation print scheduled for release on Friday. Ryan notes that the price increase reading for Thursday's quarter could indicate that March's PCE reading was warmer than expected or that revisions showed that inflation was actually higher than previously thought in January and February. Neither bodes well for rate cut prospects.

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Expectations for central bank rate cuts fell further on Thursday, having already retreated significantly this year from a peak of nearly seven cuts in early January. Markets are now pricing in a rate cut this year. According to Bloomberg data.

Key to this move is a rewrite of what consensus expects for inflation this year.

„Forecasters thought, 'Mission accomplished.' Now there's a red flashing warning sign,” Jason Furman, an economist who served as chairman of the Council of Economic Advisers under President Barack Obama, told Yahoo Finance.

He added: „The Fed can't commit enough to cut inflation anytime this year, maybe in December, probably not. Anytime we're going to get Fed rate cuts, it's a very rapid decline. The job market is better than I expected.”

Federal Reserve Chairman Jerome Powell recently reiterated that the central bank will not cut rates until there is „high confidence” in the decline in inflation.

„The latest data does not give us much confidence, instead indicating that it will take longer than expected to achieve that confidence,” Powell said on April 16.

Elsewhere in Thursday's data release, economic growth for the quarter came in below expectations. A preliminary estimate of US gross domestic product (GDP) for the first quarter showed the economy grew at a 1.6% annualized pace. In the period Economists polled by Bloomberg estimated the U.S. economy grew at a 2.5% annual pace during the period.

Economists noted that much of the slowdown in economic growth came in volatile categories that could rebound in the next quarter, with a rise in inflation the most important part of Thursday's economic data dump.

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„Real GDP and real growth on this axis is much less to worry about,” Furman said. „There was a lot to worry about in terms of inflation.”

Many strategists have argued that even if the central bank does not cut interest rates this year, the market will remain higher. But in the short term, a backlash on interest rate cut expectations has sent bond yields higher. With the current market volatility, rising bond yields are not a welcome sign for stocks.

„We live in a very bond-driven stock market today,” Michael Kantrowitz, chief investment strategist at Piper Chandler.

So far, incoming inflation data has been of little help on that front.

Stocks accelerated their losses following Thursday's GDP report.  (Photo by Michael M. Santiago/Getty Images)

Stocks accelerated their losses following Thursday's GDP report. (Photo by Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

Josh Shaffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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