The Market Today
GDP Rebounds but Disappoints; Senate Fails Skinny Test
by Craig Dismuke, Dudley Carter
Today’s Calendar – GDP Rebounds in 2Q but Disappoints Optimistic Expectations: The economy expanded a disappointing 2.6% in the 2Q while 1Q growth was revised down from 1.4 to 1.2%. Consumer spending, the largest component of activity, rose at a solid, but weaker-than-expected, 2.8% pace. Inventories, which were expected to rebound in 2Q after a weak 1Q, actually fell $300k. Business investment in equipment/structures/intellectual property rose 5.2% which was fractionally better-than-expected. However, residential investment (housing) fell a surprising 6.8% 2Q. External trade added 0.2% to the GDP tally as exports rose 4.1% and imports fell 2.1%. Government spending added 0.1% to the GDP tally, up 0.7% on a 5.2% increase in federal defense spending. Non-defense spending fell 1.9% and state and local spending dropped 0.2%. The disappointing report came despite the weakest level of core PCE inflation growth since 2010. Core PCE rose 0.9% in 2Q, down from an annualized rate of 1.8%. Weaker inflation means a smaller drag on real GDP growth. All told, year-over-year growth is now running at 2.1%, still yet to see anything resembling a breakout.
The Employment Cost Index, one of the most relied upon measures of wage growth, was also weaker-than-expected growing just 0.5% in 2Q. On a YoY basis, the ECI dropped slightly to 2.37%. Despite an uncommonly low unemployment rate, wages continue to defy the academicians models.
At 9:00 a.m. CT, the University of Michigan will release its final July consumer confidence report. Minneapolis Fed Bank President Kashkari is scheduled to speak at noon.
Overnight Trading – Senate Fails to Pass Skinny Plan; German Inflation Hotter than Expected: The Senate failed in a late-night effort to pass a “skinny” version of a healthcare replacement bill which would have 1) repealed the individual and employer (temporarily) mandates, 2) temporarily repealed the medical device tax, 3) give flexibility to states via waivers, 4) increase HAS contribution limits, and 5) fund community health centers. Republicans needed 50 votes to pass the skinny repeal but could only corral 49 votes in a late night vote. The next step for Republicans is unclear at this point. Treasury yields were only moderately affected with the 10-year yield dropping from 2.31 to 2.30%. However, eurozone data overnight was reasonably solid and German inflation came in stronger-than-expected. Headline inflation rose from 1.6 to 1.7% YoY while core harmonized rose 0.4% MoM (exp. +0.3%) keeping the YoY rate at 1.5% (exp. drop to 1.4%). The hotter inflation pushed Eurozone sovereign yields higher overnight, the German 10-year yield rising from 0.53% to 0.58%. As a result, the 10-year Treasury yield rose from 2.30 to 2.33% coming into this morning’s U.S. trading.
Yesterday’s Trading Activity – Stocks Partially Recover from Tech Drop as Yields Recoup a Portion of Wednesday’s Fall: Tech stocks tanked Thursday, pushing the S&P and Nasdaq into negative territory and dragging the Dow down briefly from its intraday high. Before the market closed, the Nasdaq and S&P had both partially pared their losses and the Dow managed to return to positive territory to close at a new all-time high. Boeing added to its Wednesday gains, accounting for 52 of the Dow’s 86-point gain on Thursday, while Verizon rose 7.7% to contribute another 23 points. Verizon’s big day, driven by larger-than-expected subscriber growth, also helped the telecom sector to a first place finish within the S&P. Treasury yields saw a bit of intraday volatility but remained higher for the entirety of the U.S. session. The 2-year yield rose 0.8 bps to 1.36% while the 10-year yield added 2.3 bps to 2.31%. The Dollar was the top performing major currency and managed to recover most of Wednesday’s post-Fed decision sell-off. Crude prices rose for a fourth consecutive day as U.S. WTI took its weekly tally to +7.4% and closed above $49 per barrel for the first time since late May.