US Economy Activity Increases in Q2

According to a report released by the Bureau of Economic Analysis (BEA) earlier today, US real GDP (Gross Domestic Product) increased more than expected in the second quarter ([Q2] April to June), rising at an annualised rate of +2.8% in the advance estimate. This comfortably surpassed the market’s median estimate of +2.0% and marked a meaningful rise from the annualised rate of +1.4% in Q1.

The US dollar, per the US Dollar Index, advanced in the immediate aftermath of the release, clawing back most of the day’s losses from session lows of 104.08. US Treasury yields also caught a modest bid, while US equity cash markets opened stable.

Robust Consumer Spending

The rebound in US economic activity came amid an increase in consumer spending – which rose +2.3% in Q2 from +1.5% in Q1 – with all personal consumption expenditures sub-categories but services displaying a rise in the quarter, particularly durable goods, up 4.7% from a fall of -4.5%. Coupled with the jump higher in consumer spending and business and government spending increasing in Q2, this offset a contraction in residential investment, down -1.4% in Q2 from +16.0% in Q1.

The report added that the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, rose +2.6% in Q2, easing from a rise of +3.4% in Q1, while core PCE rose +2.9%, slowing from an increase of +3.7%.

Fed Still Likely to Cut In September

Today’s GDP report suggests that the US Federal Reserve (Fed) will be slightly more at ease with leaving the Fed funds target range on hold next week. That soft-landing scenario is now looking more attainable.

In addition to the PCE measures slowing in today’s report, price pressures in the US are showing signs of cooling, with year-on-year headline CPI (Consumer Price Index) inflation easing to +3.0% in June. The labour market has also recently demonstrated symptoms of loosening, with unemployment ticking to its highest level since late 2021.

According to the Overnight Index Swaps (OIS) market, swaps traders moderately decreased their bets on rate cuts over the year. At next week’s meeting, Fed officials are expected to maintain the Fed funds target range at its 23-year high of 5.25%-5.50%. However, September’s meeting remains fully priced in for a rate cut.

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