The advance Q2 GDP at 4.1% was generally in line with expectations, although some estimates went from 4.2%, to 4.4%. Q1 was revised from +2.0% to 2.2%. The Q2 price index was thought to be +2.2% but increased to 3.0%; the core (excluding food and energy) however, was 2.0% and declined from 2.2% in Q1. Q1 GDP price index overall was revised from 2.2% to 2.0%. Q2 real consumer spending estimate was 2.9% but increased to 4.0%, Q1 consumer spending originally reported at +0.9% revised to +0.5%. The initial reaction in markets was rather subdued; stock indexes in futures are trading slightly better, the 10-yr note at 8:45 2.96% -2 bps from yesterday’s close, MBS price +6 bps from yesterday. This is the first of three Q2 reports and is subject to revisions; the advance release doesn’t have all of the details for the third month in the quarter. The headline growth is the strongest in 4 years.
Compared to the second quarter of 2017, the economy grew 2.8%. Output expanded 3.1% in the first half of 2018. Much of Q2 growth came from consumer spending and soybean shipments to China — hurried shipments before the tariffs imposed early this month. The United States put 25% duties on $34B worth of Chinese goods effective July 6. There is a question that the economy can sustain this kind of growth through the remainder of the year as tariffs begin to more directly impact prices and less consumer spending as a result. Economists in a Reuters poll earlier this week predicted that growth will slow notably from here. The report does nothing to change the outlook for the Fed increasing rates at least once more this year, but the debate continues with many still looking for two more increases this year. Inflation is likely to increase with increasing prices driven by the tariff battles.
At 9:30 am EST the DJIA opened +11, NASDAQ +37, S&P +5. The 10-yr note 2.95% down 2 bps from yesterday.
At 10:00 am the final July U. of Michigan consumer sentiment index was thought to be unchanged from the mid-month at 97.1; as released the index ay 97.9.
Along with today’s GDP report the Bureau of Economic Analysis released revisions to data going back to 1929; the BEA does the revisions every five years. Q1 growth over the past five years was revised higher than all those Q1 releases; the savings rate in 2016 and 2017 revised from 4.2% to 6.7%, but the fly in the molasses is that the savings rate increased mainly because small business owners made more income and saved more.
The take away this morning is what was expected — a growing economy and stable inflation. As the market reaction remained generally subdued, the 10-yr note yield went slightly lower at 2.96%, down 1 bp. Still, the technicals remain slightly bearish. After the recent jump in rates last Friday and this Monday when the 10-yr climbed above 2.90% support, sending the rate to 2.98%, the bond and mortgage markets are consolidating the increases with no substantive improvements. The Q2 GDP at 4.1% is generally as expected, but some are focusing that it was less than the final consensus of 4.2%.