Big Picture

US Data is sending mixed signals

The Week That Was

This past week saw release of both the advanced estimates of Q2 GDP in the US and monthly PCE inflation data. The results might be slightly confusing for Fed Policy as we move into the fall.

Let’s start with the GDP number first. The quarterly number printed at 2.8%, up from 1.4% in the first quarter and well above both Fed and market estimates. GDP growth as measured by PDFP (calculated by adding total personal consumption expenditures with total fixed investment) is now running just north of 3% for the second quarter, up from 1.7% in Q1. At the surface, this is a good level of growth despite anecdotal evidence suggesting that growth was slowing down in the US. When we look at the data a little deeper, the rebound in Q2 consumer expenditures data was led by goods consumption where as service related consumption actually slowed down somewhat. On the fixed investment side, the rebound was driven by a strong bounce in private inventories which came in at +0.8% on the quarter, up from -0.4% in Q1. Actual gross fixed investment was down from the previous quarter coming in at 0.64%.

While the overall growth mix isn’t ideal…..(I’d prefer services driven consumption, and actual net investment rather than growth as a result of re-stocking inventories) it still indicates an overall healthy US economy for now.

Last week also saw the release of Core Pce…. which came in slightly higher than market expectations at +0.2%, mostly due to a rebound in Goods prices. The Headline number however came in at a more benign +0.1% as energy prices still exert a drag on headline inflation and prices for shelter continue to cool.

That now puts the annual pace of inflation(as measured by Core Pce) in the US somewhere in the neighbourhood of 2.5% per annum.

If we combine that annual rate with growth in PDFP of 3%, we get a nominal GDP growth rate in the US of around 5.5% for the 2nd quarter.

That pace of nominal GDP growth roughly equals the Fed’s current overnight rate of interest which sits at 5.33%. So for now…..despite market concerns about a looming recession in the US……. to me there is no real evidence to suggest that things are slowing down just yet.

If anything, growth actually seems to have remarkably picked up in the second quarter.

Looking Ahead

The Fed is scheduled to meet next week, just ahead of the June Jobs report, where markets are anticipating a clear signal for a September rate cut. While recent rumblings from Chairman Powell have been more dovish, this last weeks strong Q2 GDP report and slightly higher Core Pce print will limit him from firmly pre-committing to a rate cut in September unfortunately. It will be interesting to watch how he manages to tow this very delicate line in Wednesday’s press conference.

Next week will also see the release of monthly GDP data out of Canada for June and flash estimates for July CPI out of Europe. Both sets of data will be keenly watched by markets as they will have a direct impact on monetary policy as we head into the fall for those two respective economies.

I will also be keeping a very close eye on activity and confidence related data out of Sweden this week as recent currency depreciation of the Kroner has hit some critical levels on charts and vigilance is now firmly warranted.

And finally, we are set to receive IP and retail sales data out of Japan on Tuesday, ahead of the BOJ’s monetary policy meeting on Wednesday where they are expected to provide markets with a detailed account of how they plan on executing their bond purchases taper…..something they had promised to markets at their last meeting back in June.

Further clarity on the Boj’s taper strategy will be welcomed by markets, all else being equal.

But as always, I shall keep you posted here at Purity Macro.

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Disclaimer

The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.