Will Market Respond Toward Positive GDP Number? - Economic Highlights


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The positive GDP report this morning will likely not be enough to offset the overhang from Ukraine-centric worries in today's session. But this is nevertheless a welcome and reassuring read on the economy.  

The GDP growth picture modestly improved in the second look relative to what was reported a month back - with growth getting revised to +4.2% from the originally released +4% pace and consensus expectations of no revision. This a major turnaround from the fall into the negative territory in Q1, which was partly due to weather-related issues.

The improvement in Q2 GDP growth came from more non-residential fixed investment (up +8.4% on second look vs. +5.5% the first time around) and less drag from international trade, partly offset by less inventories related growth and housing. Personal consumption expenditures or consumer spending remained unchanged relative to the first look at +2.5%, but up from Q1's +1.2% growth pace.

Weather is a handy explanation for what happened in Q1, though it doesn't fully explain the awful performance that quarter. But the saving grace is that whatever held the economy back in Q1 didn't have much staying power, resulting in the solid bounce-back.

Today's positive revision is essentially backward looking and doesn't tell us much about what to expect in the current and coming quarters. But it nevertheless welcome, particularly the upgrade to business capital spending in the quarter, which has been a weak link in the economic recovery.

All recent data has been pointing towards a sustained growth pace in the +3% vicinity going forward. Next week's busy line-up of economic reports - from the ISM to the August jobs numbers - will do more to shape expectations for the quarter. But the consensus view is that the U.S. economy may finally be on the cusp of graduating to a sustained 3+% growth rate in the second half of the year. The Fed seems be on board with this view as well. And that's why they have started removing some of the extraordinary policy measures - QE is on track to end in October and they are discussing when to start to raising interest rates.

One would have expected this macroeconomic backdrop to push benchmark interest rates higher. But the geopolitical worries (Ukraine, Iraq, etc.) and deflationary fears for the Euro-zone are keeping interest rates in check. The Ukraine fears that are keeping stocks down in today's session is a timely reminder that investors take refuge in safe-haven assets like the U.S. and German treasury bonds in times of uncertainty.

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This article appears in: Investing , Economy

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