Consumer, business spending lifts Q2 GDP growth

Consumer, business spending lifts Q2 GDP growth

July 27:

The initial look at Q2 Gross Domestic Product shows a 2.4% increase, significantly larger than the market had expected. That follows a 2.0% increase in GDP in the first quarter and reflects continued strength in both consumer spending and business investment.

There will be two revisions to Q2 GDP, one in each of the coming months, as more data become available.

Surprise growth in manufactured durable goods orders last month

Advance Durable Goods surprised analysts with a 4.7% increase in June. That was largely dependent on orders for transportation equipment, which were up 12.1%. Excluding transportation, new orders for manufactured durable goods were up 0.6%.

The level of business investment is reflected in orders for non-defense capital goods excluding aircraft, which were up 0.2% — better than expected but less than May’s 0.5% increase.

New unemployment claims continue to decline

Weekly initial jobless claims dropped to 221,000 last week — the lowest number since late February. The four-week moving average now stands at 233,750.

New home sales fell 2.5% last month

New home sales dropped 2.5% in June, the first decline in sales since February.

Fed raises rates 0.25%

The Federal Open Market Committee came through with a widely anticipated 0.25% increase in the target Fed funds target range at its meeting yesterday. Here’s what happened:

  • A 0.25% rate hike moves the target Fed funds range from 5.00-5.25% to the new range of 5.25-5.50%. That is the highest level since March 2001.
  • The Interest on Reserve Balances rate (IORB, sometimes referred to as IOER) moved up 0.25% from 5.15% to 5.40%.
  • Most banks raised the Prime rate from 8.25% to 8.50%.
  • The overnight Secured Overnight Financing Rate (SOFR) will likely increase about 0.25% as well. It has been trading at around 5.05-5.06% recently, so it should adjust to roughly 5.31%. That won’t show up until tomorrow morning, because the overnight SOFR rate is always published on a one-day lag.

Today’s action had already been built into the one-month Term SOFR rate (currently at 5.32%), so there should be very little change in that rate over the next few days. Given the FOMC is generally expected to leave rates where they are at its September meeting, the one-month Term SOFR rate is expected to remain pretty well nailed down until at least Oct. 1, one month before the Nov. 1 meeting. If the Federal Reserve is expected to hold rates steady even longer, we might not see much change in the one-month rate for quite a while.

The six-month Term SOFR is currently at 5.45%. Its fate depends on the Fed’s expected course over the next six months, or between now and mid-January. The rate will begin to shift only when the Fed’s next tightening or ease is expected to occur within the coming six months, so we may see it begin to respond later this year.

Fed leaves door open for future rate changes

The press release the Fed issued after yesterday’s meeting conclusion was very similar to the one issued after the June 14 meeting. However, in yesterday’s press release, the Fed stated economic activity is now growing at a “moderate” pace after previously stating it was expanding at a “modest” pace. In his press conference, Fed Chair Jerome Powell indicated that his staff is no longer forecasting a recession.

The Fed, describing its outlook on whether additional rate hikes might be needed, said it will watch, wait and do what needs to be done.

The continued strength of the labor market gives the Fed the latitude to tighten further if necessary, but the recent softer inflation numbers may lessen the likelihood of further action. It is worth noting that “core” inflation numbers, which exclude food and energy, have been running higher than overall or “headline” inflation for both the Consumer Price Index and the Personal Consumption Expenditures price index. While the headline PCE price index is the statistic the Fed aims to bring to 2% over the long run, the core numbers provide better clues as to how the headline data will evolve. The next PCE price index release is on Friday.

There is now a rather long 56-day gap until the next FOMC meeting. A lot can happen before then: There will be two more employment reports and two more Consumer Price Index reports. That leaves a lot of room for unexpected economic data, news headlines and pure speculation. In other words, there’s no reason to expect bond market volatility to calm down.

European Central Bank raises rates

The European Central Bank also raised its benchmark 0.25% yesterday, as anticipated. ECB President Christine Lagarde indicated the central bank will keep its options open next time around.

State of the market

This morning’s strong economic numbers lend further credence to the view that the economy is hitting a soft landing rather than a recession, although there are certainly folks who disagree. As of this morning, Fed funds futures indicate low expectations of any rate change at the Sept. 20 FOMC meeting, and about a 45% chance of a 0.25% hike on Nov. 11.

This morning, the Dow traded up this morning and Treasury yields were changed little from Wednesday morning.

Economic calendar

Friday, July 28

  • Personal Consumption Expenditures Price Index
  • Personal Income/Personal Spending
  • Employment Cost Index
  • University of Michigan Consumer Sentiment

Treasury calendar

Wednesday, July 26

  • Yesterday’s auction of $24 billion in two-year Floating Rate Notes resulted in a high discount margin of 0.125%, with demand lower than at the previous such auction.

Thursday, July 27

  • $35 billion auction of seven-year Treasury notes 
By Mike Kraft, Executive Director and Commercial Real Estate Treasurer for Commercial Banking
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