US GDP Growth Falls Short Of Expectations In Q1: Markets React To Potential Fed Policy Shift

The U.S. gross domestic product (GDP) increased at a 1.1% annualized pace in the first quarter of 2023, well below analyst expectations of 2% growth, according to advance estimates released Thursday by the Bureau of Economic Analysis.

Markets were volatile after the release, with investors attempting to predict how the Fed will change its policies in response to the latest economic data.

What To Know: The U.S economy expanded at a 1.1% q/q annualized rate in the first quarter, behind market expectations and decelerating from the 2.6% reading in the fourth quarter of 2022. 

The increase in real GDP was reflected by increases in consumer spending, exports, federal government spending, state and local government spending and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment. 

The GDP price index, which measures changes in the prices of goods and services produced, increased 3.8%, more than the expected 3.7% and marginally lower than the 3.9% figure in the fourth quarter, showing that price pressures continued to hold last quarter.  

The current‑dollar GDP, also referred as nominal GDP, increased 5.1% at an annual rate in the first quarter, or $327 billion, to a level of $26.47 trillion. In the fourth quarter it rose 6.6%, adding $414 billion.

Market Reactions: On the rates front, before Thursday's data release, markets were pricing in a 75% likelihood of a 25-basis-point hike at the May 3 FOMC meeting and expected rates to remain on hold in June at a 60% probability, according to CME Group Fedwatch tool.

Expectations for a rate hike in May slightly moved up to 78% Thursday, while June probabilities remained unchanged. 

Futures on the S&P 500 index traded 0.3% weaker, indicating possibilities of another volatile session for the SPDR S&P 500 ETF Trust SPY 

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