Germany GDP surprises to the upside

• Final readings for Germany’s GDP came back stronger than expected as Europe’s largest economy recorded 0.1% growth in the second quarter of 2022, exceeding the preliminary estimate of 0.0%. Government expenditure was the primary driving force behind the expansion, but these figures will do little to alleviate concerns for the economy going forward. The IFO expectations index for August fell slightly from 80.4 to 80.3, better than the predicted figure of 79.0, but current conditions also declined. Furthermore, surging inflation continues to hamper households and businesses, as recent PMI data points to a second successive month of contraction in the private sector. Pressure continues to mount as the country rushes to lower its dependency on Russian gas and further headwinds are expected.
• US initial jobless claims for the week ending August 20 fell by 2k to 243k, better than market expectations. Continuing claims also dropped, down to 1.4m. The strong performance of the US labour market along with persistently high inflation, if a touch slower in July, will keep the Fed on a hawkish edge over the coming meetings.
• The second estimate of US GDP for Q2 came in at an annualized decline of -0.6%, better than the initial estimate of -0.9% and ahead of market expectations of a revision to -0.7%. Personal consumption looks to have been the main driver behind the improved growth estimate as it rose by 1.5% q/q in Q2 compared with a 1% initial estimate. Investment, however, remains substantially weak at -13.2% while export growth was revised lower. Both the Federal Reserve and US administration have sought to look past the two consecutive quarters of negative GDP growth and instead focus on the strong levels of job growth in the US economy along with inflation as the main variables in setting policy.

Today’s Economic Data and Events

• 16:00 US Personal spending July: forecast 0.5%
• 16:30 US PCE deflator July y/y: forecast 6.4%
• 18:00 US University of Michigan sentiment August: forecast 55.3

Fixed Income

• US Treasuries rallied overnight, helped by a successful auction of 7yr notes. Yields on the 2yr UST dropped 2bps to 3.3661% while the 10yr yield fell almost 8bps to 3.0258%. Elsewhere, European bonds were also stronger ahead of the start of the Jackson Hole summit, with the 10yr bund yield down 5bps to 1.310% and the 10yr gilt yield falling 8bps to 2.612%.
• Raphael Bostic, President of the Atlanta Fed, said that “inflation is a big problem” and that he would “toss a coin” between supporting a 50bps of 75bps hike ahead of the September FOMC meeting. Bostic’s comments reinforce the hawkish consensus coming out of Fed speakers in recent weeks, prompting a repricing of rate risks by markets. Options markets are roughly split between whether the Fed will hike by 75bps or 50bps at the September meeting.
• Elsewhere, Esther George, the president of the Kansas City Fed, said the Fed needed to “get interest rates higher to slow down demand” ahead of the Jackson Hole symposium that is hosted by the regional Federal Reserve Bank. The chorus of hawkish commentary from Fed officials is likely to increasingly open the way to another large 75bps at the September meeting.

FX

• The euro failed to hold onto a run up above the 1 level overnight, closing the day little changed at 0.9975. GBPUSD was a little better, rallying by almost 0.3% to 1.1832 while USDJPY pulled lower by almost 0.5% to 136.49.
• In commodity currencies, USDCAD fell by 0.3% to 1.2924 while AUDUSD rallied a strong 1% to 0.6981.

Equities

• US equity markets enjoyed another day of gains yesterday, with all three benchmarks closing higher. The NASDAQ was the primary gainer as it added 1.7%, followed by the S&P 500 (1.4%) and the Dow Jones (1.0%).
• In Europe, the CAC closed down -0.1% but there were gains elsewhere. The composite STOXX 600 added 0.3% on the day, with the DAX closing 0.4% higher, aided by some better-than-expected data out of Germany.
• Locally, the ADX gained 0.2% while both the DFM and the Tadawul ended the day 1.2% higher. Egypt’s EGX30 gained 1.8% yesterday but remains down -13.9% ytd.

Commodities

• Oil prices settled lower after a few days of gains as markets anticipate hawkish commentary from central bank officials at this weekend’s Jackson Hole symposium. Brent futures settled lower by 1.9% to USD 99.34/b while WTI fell by 2.5% to USD 92.52/b.

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