The US economy grew 2.8% in Q2

US GDP growth was much stronger than expected at 2.8% q/q annualized in Q2. The median forecast was for 2.0% growth, up from 1.4% in Q1. Personal consumption was also firmer than expected at 2.3% in Q2, up from 1.5% in Q1, suggesting that consumers remain resilient even as inflation and higher borrowing costs have eroded purchasing power. However, core PCE inflation, the Fed’s preferred inflation measure, was also higher than forecast at 2.9% in Q2, but markedly lower than the Q1 reading of 3.7%. Separately, durable goods orders fell -6.6% m/m in June, but this was due to lower aircraft orders, with investment in business equipment (both machinery and computers/ electronics) rising at a faster pace in June relative to the prior three months. Overall, the preliminary GDP data supports our view that the Fed is likely to keep rates on hold next week, with September the likely start of the easing cycle.

Germany’s IFO business climate index declined unexpectedly to 87.0 in July, with weakness both in the current conditions component as well as in expectations. The IFO data follows the disappointingly soft manufacturing PMI reading for Germany released on Wednesday. Weak demand from China has weighed on Germany’s export-oriented industry, although a recovery is still expected in H2 2024.

Key Economic Data and events

16:30 US personal income (Jun) forecast 0.4% m/m

16:30 US personal spending (Jun) forecast 0.3% m/m

18:00 University of Michigan consumer sentiment (prelim, Jul) forecast 66.4

Fixed Income

• 2y treasury yields were unchanged on Thursday at 4.43% while the 10y yield declined -4bp to 4.24%. The market is pricing no change at the FOMC meeting next week after stronger than expected GDP data for Q2. A 25bp rate cut is fully prices in September.
• 10y bonds rallied across most major markets yesterday. In Europe, the 10y Swiss yield fell -4.4bp to 0.4% while the French 10y fell -3bp to 3.12%. Gilts declined -2.6bp to 4.13%.

FX

• The dollar index was largely unchanged on Thursday as gains in EUR, JPY and CHF offset weakness in GBP and the commodity currencies. The yen continued its rally against the dollar, gaining 1.5% yesterday to 152.21/ USD but is trading a little weaker in Asia this morning. CHF appreciated 0.9% to 0.8786/USD while EUR gained just 0.1% to 1.0851.

Equities

• US stocks initially recovered a bit after Wednesday’s selloff, buoyed by the better than expected GDP data for the second quarter, but closed lower at the end of the day. Nasdaq100 fell -1.1% while the S&P500 declined -0.5%. The DJIA eked out a 0.2% gain. European stock indices closed lower, with the Eurostoxx50 down -1% on Thursday. The FTSE100 fared a little better, rising 0.4% yesterday.
• The DFMGI and ADXGI rose 0.2% and 0.4% respectively on Thursday. The Tadawul ASI declined -0.6%.

Commodities

• Oil prices rose for the second consecutive session on Thursday, with Brent up 0.8% to USD 82.37/b and WTI up 0.9% to USD 78.28/ USD. Wildfires in Canada continue to threaten oil production, but the impact so far has been limited.