US Growth Slipped in First Quarter

Global Economic and Capital Markets

As of noon on Friday, global equities were little changed on the week despite a series of volatile price swings. The yield on the US 10-year Treasury note was unchanged at 2.90% while the price of a barrel of West Texas Intermediate crude oil rose $4.75 to $106.60 on the week. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 30 from 22.7. 


US economy unexpectedly shrank in Q1
Economists expected significantly slower US economic growth in the first quarter than the blistering 6.9% annualized pace recorded at the end of 2021, but the 1.4% contraction reported on Thursday came as a downside surprise. While consumer spending was solid, rising 2.7%, a big US trade deficit, lower government spending and a decline in inventory investment pulled the overall figure into negative territory. The core personal consumption expenditures price index, the US Federal Reserve’s favorite inflation measure, rose at an annualized 5.2% last quarter. 


Rising rates, record prices crimping US home sales
In the wake of last week’s deterioration in existing home sales, sales of new homes and the National Association of Realtors pending home sales index both declined in March. The pending home sales index fell for the fifth straight month and new home sales declined for the fourth amid a squeeze in home affordability caused by rising prices and higher mortgage rates. After jumping about 20% in 2021, home price appreciation should moderate at about 8% in 2022, the NAR says. 


ECB sets stage for faster action
Amid the highest inflation since the oil shocks of the 1970s, the European Central Bank hike rates as early as July. However, ECB President Christine Lagarde took pains this week to draw sharp distinctions between the likely actions of the ECB and those of the Fed. Inflation in the eurozone us not as broad-based as in the United States, she said, and concentrated largely in food and energy prices as a result of Russia’s invasion of Ukraine. Core inflation in Europe, though above target, is about half the US level, Lagarde observed, adding that European labor costs are growing more slowly than those in the US. The ECB chief acknowledged that there is a high probability of a rate hike in early Q3, though she cautioned that the pace of upcoming rate hikes will likely be more gradual than in the US. 


China rolls out more economic support
With COVID-19 lockdowns disrupting the economy, Chinese officials took a number of steps this week to shore up economic growth. President Xi Jinping called for a substantial boost in infrastructure construction while the People’s Bank of China said it will strengthen support for the real economy and push for a resolution of its crackdown on technology companies. On Thursday, the State Council said it would promote the growth of Internet platform companies to facilitate job creation while introducing temporary subsidies for workers who are ineligible for unemployment insurance. On Friday, the Politburo pledged further policy support, including tax and fee cuts and quicker implementation of existing policies to stabilize the economy and markets, promote consumption and boost employment. Economists increasingly expect that China will struggle to reach its target growth rate of 5.5% this year due to its zero-COVID policy. Unemployment in China rose to 5.8% in March, the highest level since early in the pandemic.


Eurozone inflation hit the highest level since the launch of the euro in 1999, reaching 7.5%, while core prices rose a more-than-expected 3.5%, increasing the pressure on the ECB to begin normalizing its extremely accommodative monetary policy. Meanwhile, economic growth grew 0.2% in the first quarter of the year, down from 0.3% in Q4. 


Consumer spending in the US rose 1.1% in March while personal income rose 0.5%. Spending on services rose at a faster pace than on goods, the US Bureau of Economic Analysis reported Friday. 


The US Department of Labor reported that its employment cost index rose 4.5% in Q1, the fastest pace since 2001.


Russia this week halted natural gas shipments to Poland and Bulgaria after the countries refused to pay for fuel in Russian rubles, as the Kremlin had demanded. European Union nations are helping to make up for any shortfalls. Germany is reportedly set to drop its opposition to an EU embargo on Russia oil, setting the stage for a phased embargo over coming weeks. 


US President Joe Biden asked Congress for $33 billion to support Ukraine. The appropriation would cover US military, economic and humanitarian aid for the remainder of the current fiscal year. 


The US dollar strengthened broadly this week, with the euro dropping below $1.05 and USD/JPY rising above 130 (a two-decade high). The yen weakened sharply after the Bank of Japan made no changes to its super-loose monetary policy at its rate-setting meeting this week. 


Sweden’s Riksbank surprised markets on Thursday by hiking interest rates from 0% to 0.25%. 


Early this week, South Korea downgraded COVID-19 from the country’s riskiest category of infectious diseases.


Current Fed governor Lael Brainard was confirmed as the central bank’s vice chair by the Senate.


The latest reading of Australian core inflation accelerated to 3.7%, setting the stage for a series of rate hikes from the Reserve Bank of Australia. 


With just over half of the constituents of the S&P 500 Index having reported for Q1 2022, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings growth is running at 7.1% while sales rose about 12.5% compared with the same quarter a year ago, according to data from FactSet Research. Among the key themes heard on earnings calls were solid demand, continued input price pressures, dollar strength and weaker earnings guidance. 

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research,


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