REFILE-INSTANT VIEW-Tame March PCE inflation no salve after downbeat Q1 US GDP report

April 30 (Reuters) - Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 0.7% in March after an upwardly revised 0.5% gain in February, the Commerce Department' said on Wednesday. Economists polled by Reuters had forecast consumer spending would rise 0.5% after a previously reported 0.4% increase in February.

The data was included in the advance gross domestic product report for the first quarter that was published earlier on Wednesday, which showed GDP contracted at a 0.3% annualized rate last quarter, weighed down by a record surge in imports.

President Donald Trump's sweeping tariffs have fanned fears the economy is facing a period of tepid growth, even recession, and high inflation, commonly referred to as stagflation. The Personal Consumption Expenditures (PCE) Price Index was unchanged in March after advancing 0.4% in February. In the 12 months through March, PCE prices increased 2.3% after rising 2.7% in February.

MARKET REACTION:

STOCKS: The S&P 500 .SPX was down 1.7%, holding losses after the data but off the day's lowest levels

BONDS: U.S. Treasury 10-year yield seesawed in a small range US10YT=TWEB and was up 0.5 bp at 4.1792%. The two-year yield US2YT=TWEB was 4.1 bp lower at 3.617%

FOREX: The dollar index =USD likewise gyrated and was 0.28% higher

COMMENTS:

CHARLIE RIPLEY, SENIOR INVESTMENT STRATEGIST, ALLIANZ INVESTMENT MANAGEMENT, MOUND, MINNESOTA

"Personal consumption was up slightly from expectations. When you layer in the (PCE) inflation data, it was a little bit better than expected from an overall perspective, coming in a little bit lighter. But I don't think that's the number that the market's reading too much into."

"The labor market data is really key as we go forward from here... any meaningful slowdown in hiring or job separations is going to lead to a deterioration in consumption."

"The Fed has been very data dependent and they're going to want to see some of this hard data like GDP and some of the labor market data really show signs of weakness. We are starting to see a little bit of that, which is really why you're seeing the market reacting the way it is today."

OLIVER PURSCHE, SENIOR VICE PRESIDENT, ADVISOR, WEALTHSPIRE ADVISORS, WESTPORT, CONNECTICUT

"It's important to realize that a large chunk of the fall in GDP is due to the sharp increase in imports, which take away from GDP growth. And that's probably due to the expectation of tariffs. So, if you were to normalize that, you end up with positive GDP growth for the quarter, but it certainly doesn't bode well for Q2, which is why the market is selling off.

HARRY CHAMBERS, ASSISTANT ECONOMIST, CAPITAL ECONOMICS, LONDON (by email)

"The almost unchanged level of core PCE prices in March is welcome news but, given the data precede the implementation of broad-based tariffs, core inflation will inevitably rebound sharply in the coming months. Otherwise, the strong rise in real consumer spending last month should soothe fears that consumers are retrenching in the face of economic uncertainty.

"The 0.03% m/m rise in core PCE prices is smallest rise since April 2020 and the first below-target-consistent reading in four months. It pushed the annual core inflation rate down to 2.6%, from an upwardly-revised 3.0% in February. The three- and six- month annualized rates also fell to 3.5% and 3.0% respectively. The breakdown shows a fall in core goods prices, whereas core services prices edged up. That said, March’s data naturally do not reflect the impact of the broad-based tariffs implemented in April, so goods prices will rise much more strongly in the coming months. As a result, we expect core PCE inflation to reach a peak of almost 4% later this year."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"Weak private sector payroll growth, faster inflation than expected, and a negative GDP print all point in the direction of stagflation. To get the stagflation of the late '70s and early '80s would require much higher unemployment and inflation, so this is more of an aroma of stagflation than an actual stench of stagflation.

"On the surface, the negative sign on GDP growth is upsetting, but final sales to domestic purchasers increased at a pretty decent 3% annualized pace. The surge in imports showed up mostly in information processing equipment and is in the “investments” bucket of GDP.

"It’s unfortunate that the convention is to focus on spending instead of production. In GDP, the P stands for production, not spending. To back into actual production, they subtract out imports, so it perpetuates the myth that imports are a bad thing.

"Real Gross Value Added is a better way to look at actual production instead of spending. Those details show where the real pain is being felt. Business value add fell 0.65% with farm value add falling a massive 35%. Federal government value add fell 1.6%."

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER AT DAKOTA WEALTH IN FAIRFIELD, CONNECTICUT

"Inflation is up. The economy is slowing more. It's not a great environment for the equity market. GDP is backward looking but it doesn't portend good information going forward not with the environment we're currently in. There's still uncertainty with the trade tariffs being high, and uncertainty around what's going to happen."

"People are pulling back on spending. People not being sure about their jobs. If you're unsure about your job you're certainly not going to be making major purchases or life changing decisions as far as purchases are concerned."

WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY

“It’s a surprising number to the market on the downside. This is sort of in line with what we've been anticipating that we might be entering into a 70s-like scenario with weakening economic growth and still sticky, persistent inflation. That’s where you are seeing the response between bond yields moving up and equities going down. But we do need to take a step back because there is some noise in this GDP report because of the pull forward activity on inventory build and then the shipments of gold that impacted the international trade number that goes into the GDP data.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO

"When you look to real final sales, which fell 2.5%, that's the GDP not counting the inventory data, that's a significantly weak number. It's the weakest since the pandemic period and prior to the pandemic you have to go back to 2009 to find a quarter that has a weaker real final sales. So I think that's probably the reason for the bonds to jump initially, but reconsidering, they probably looked over to the inflation measures, the GDP deflator and the PCE core, both significantly higher than anticipated. And so there was a little bit of a push me pull you on the bond market as a result of the report."

PETER ANDERSEN, FOUNDER OF ANDERSEN CAPITAL MANAGEMENT, BOSTON

"There shouldn't be a surprise, but the market is acting as if it is a surprise. This period where tariffs are trying to be negotiated and acknowledged by the market makes things extremely difficult to model, predict, etc. When the market cannot make a reasonable prediction, it tends to turn to the pessimistic interpretation of things."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The economy has shown negative growth, which means that we are probably already in a mild recession, or we're about to enter a mild recession.”

“That's obviously bad news but I would kind of think that the market has been already discounting the possibility of a mild recession now.”

“We got to these numbers because of Trump's policies, right? They've created uncertainty and when you create uncertainty, nobody's going to put their foot on the accelerator, and we're seeing that as the earnings come out, right? Guidance has been pulled back.”

“So Trump's policies have created this. But you know, he himself many times has said we might be headed for recession. He's not denied that. Is he going to take a victory lap with these numbers? No, of course not.”

“But these numbers may accelerate the administration in perhaps reversing the tariff policy, and that would psychologically be a big boost to the economy.”

“I think the damage has already been done and so no matter what they do now, they just have to hope that the recession is not a steep one and that the there is a positive ending to the tariff situation. That's what the administration needs to hope for at this point.”

JAMIE COX MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND VIRGINIA.

"I'm not surprised the headline GDP print wasn't worse, given the surge in imports. Underneath, however, real final demand remains super strong. Those who underestimate the US consumer, do so at their own peril."