New data from the Bureau of Economic Analysis has revealed a slowdown in the US economy during the first three months of the year, causing concerns for investors. Even more alarming is the acceleration of inflation, surpassing Wall Street's expectations and sending shockwaves through markets on Thursday.

The "core" Personal Consumption Expenditures (PCE) index, which excludes the volatile food and energy categories, grew by 3.7% year-over-year in the first quarter. This is higher than the estimated 3.4% and significantly higher than the 2% gain seen in the previous quarter. It marks the first quarterly increase in the Federal Reserve's preferred inflation gauge in a year, raising concerns that the central bank may not cut interest rates as quickly as previously projected.

The disappointing earnings report from Meta on Wednesday further sparked losses in markets, causing all three major indexes to drop more than 1% midday. Bond yields also experienced a significant spike, with the 10-year Treasury yield reaching above 4.7% for the first time since early November.

Deutsche Bank senior US economist, Brett Ryan, highlighted the troubling aspect of the data release, stating that the inflation print of the core PCE index was the main concern for the Federal Reserve and the market. Ryan explained that this puts the Fed in an awkward position and raises doubts about the possibility of any rate cuts this year. Friday's upcoming inflation print may further exacerbate the situation, with expectations that either March's PCE reading will be higher than anticipated or revisions will show higher inflation levels in January and February.

Given these developments, expectations for Federal Reserve rate cuts have diminished throughout the year. Bloomberg data now reflects the market pricing in only one rate cut for this year. This change in consensus reflects a rewriting of expectations for inflation and its trajectory in the coming months.

Federal Reserve Chair, Jerome Powell, recently stated that rate cuts will not occur until there is "greater confidence" in the decline of inflation. However, the recent data has not provided this reassurance, leading Powell to acknowledge that it may take longer than expected to achieve that confidence.

In other economic data released on Thursday, the advance estimate of first quarter US gross domestic product (GDP) fell short of expectations. The economy grew at an annualized pace of 1.6% during the period, lower than the estimated 2.5% growth predicted by economists surveyed by Bloomberg.

While economists noted that a large portion of the growth slowdown came from volatile categories that could rebound in the next quarter, the increase in inflation remains the most crucial aspect of Thursday's economic data release.

The market could still see growth even without interest rate cuts this year, according to many strategists. However, the scaling back of rate cut expectations has led to an increase in bond yields, which is not favorable for stocks in the current market dynamic.

The incoming inflation data provides little reassurance in this regard, further clouding the outlook for the US economy. As investors continue to monitor these developments, it remains to be seen how the Federal Reserve will navigate the increasingly complex economic landscape.