The Market Today
Economy Grows 4.1% on Resurgent Consumer
by Craig Dismuke, Dudley Carter
Economy Grows 4.1% in 2Q on Resurgent Consumer: The economy expanded 4.1% (QoQ, SAAR) in the 2nd quarter, slightly better-than-expected when taking into account the revision to 1Q growth from +2.0% to +2.2%. Moreover, had inventory growth not declined $28b, the first decline in five quarters, total growth would have come in at 5.1%. The strong rebound in 2Q brings the YoY growth rate up to 2.8%, the fifth strongest reading of the expansion. Driving growth were a surprisingly strong rebound in personal consumption (+4.0%), a strong quarter for business investment in structures (+13.3%) and intellectual property (+8.2%), the biggest contribution from external trade since 2013, and the second strongest quarter for government spending since 1Q16. On the weak side of the ledger were only the inventory drawdown and residential investment (-1.1%). This marks the fourth quarter, of the last five, in which residential investment has contracted highlighting the challenges for housing amidst rising rates and declining affordability.
Weaker Inflation than Expected: One of the more attention-grabbing figures was the weaker read on core inflation, which rose just 2.0% during the quarter versus expectations of a 2.2% increase. Investors are likely to take from this less urgency for Fed rate hikes. The initial market response shows the impact of the weaker inflation reading with short yields slightly lower (less urgency for the Fed) and longer yields slightly lower (less inflation).
Sets Foundation for Good Reports in 2H18: Going forward, the 2Q report sets the foundation for reasonably strong reports in the second half of the year. The drawdown in inventories means an inventory rebound could boost growth for several quarters to come. Business investment is clearly accelerating with tax reform as a tailwind. Personal consumption will likely struggle to clear the strong 4.0% rate in 2Q, but consumers remain in an increasingly strong financial position. Government spending is moving higher after the spending limits were raised, although at a controlled pace which can be sustained. On the negative side, external trade benefited in 2Q from some anomalous effects of the tariff dispute and is unlikely to continue adding 1.1% to the final GDP tally in subsequent quarters. In fact, it is likely to drag on growth.
Savings Rate Revised Higher: Included in the report were the benchmark revisions to previous years’ NIPA accounts, revisions to the previous 5 years’ GDP and associated figures. There were noteworthy revisions to the personal savings rate, the amount of income households save as a percentage of their disposable income. The savings rate is an indicator of consumption potential. The rate for 2016 was revised up from 4.9% to 6.7% while 2017’s figure was revised up from 3.4% to 6.7%.
At 8:30 a.m. CT, President Trump will speak on the health of the economy. At 9:00 a.m. CT, the final read on July’s consumer confidence from the University of Michigan is scheduled for release. Confidence remains very high, although it has pulled back in recent months despite ever-lower unemployment as gas prices have moved higher and tariff uncertainty has been a mainstay in the headlines.
Yesterday – Facebook Sank Tech Stocks, Treasury Yields Rose: U.S. stocks finished mixed Wednesday and Treasury yields finished higher despite spending most of the session below the prior day’s closing values. The Dow gained 0.4% to close at 25,527, its highest level since February 26. A day after the U.S. and EU signaled a willingness to work on a trade deal, industrials and materials led the index with greater-than-1% gains. The S&P 500 fell 0.3% as sharp losses in technology offset gains in 7 of the other 11 session. Utilities rose 1.1% while energy companies closed up 1.0% in a close second finish. Tech companies sank 1.6%, primarily in response to a historic day for shares of Facebook Inc. The social media giant went from hero to zero in less than 24 hours after a calamitous quarterly earnings release. The company reached an all-time high Wednesday but was down nearly 19% by Thursday’s close. The ripple effect through other tech names sent the Nasdaq down 1.0%. Treasury yields fell and recovered with European yields in response to the ECB’ latest (uneventful) decision before pushing to close near their highs of the day for a second session. The 2-year yield rose for a fifth session, adding 1.2 bps to a new cycle high of 2.69%. The 10-year yield moved up 0.2 bps to 2.98%, its highest level since May 24.
Overnight – Winding Down a Positive Week for Risk Markets: Treasury yields were essentially unchanged Friday ahead of this morning’s 2Q GDP report after a quiet overnight session for global sovereigns. The only excitement was the Bank of Japan offering to buy an unlimited number of longer government bonds after the 10-year yield moved up to its highest level (0.108%) since February 2017. There continues to be speculation the central bank could tweak current policy at next week’s meeting. Global equities are generally firmer with Chinese stocks the sole exception. The CSI 300 was down 0.4% and weaker for a third day, yet the index is positive for a third week in a row. The broader MSCI Asia Pacific Index notched a 1.7% gain this week, its largest since the first half of May. The lack of new negative developments in U.S.-China trade relations as well as this week’s U.S.-EU agreement to try and sort out their differences has helped. The Stoxx Europe 600 has tacked on another 0.4% midway through Friday’s session lifting this week’s total tally to 1.7%, its best week since March. In the U.S. equity futures were quietly positive with the rebounding Nasdaq in the lead at +0.1%. The tech-heavy index was out in front despite another disappointing earnings report from social media mainstay. While current-quarter financial metrics mostly met or exceeded estimates, Twitter’s user metrics missed. The company’s share price fell more than 15% in pre-market trading. After this morning’s boomy 4.1% 2Q GDP print, Treasury yields actually slipped to the lows of the day, potentially tied to the softer than expected core PCE inflation change.