29 July 2022
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US GDP contracts for second consecutive quarter

By Daniel Richards

  • US GDP fell by -0.9% q/q annualized in the first reading for Q2, well below the median forecast for a +0.5% rise.  The annual growth rate slowed to 2.3% y/y from 4.2% y/y in Q1. The main drag on GDP was again inventories as in Q1, but lower government spending and a decline in private investment also contributed to negative surprise. Personal consumption increased in Q2 but a slower rate of 1.0% q/q annualized (down from 1.8% in Q1), and was due mainly to increased spending on services as consumption of goods declined. A sharp recovery in exports helped to provide a boost to GDP from net trade in Q2.
  • While many economists would define a recession as two consecutive quarters of negative GDP growth, in the US it is a panel of economists at the National Bureau of Economic Research who decided on when business cycles start and end, and their definition of a recession is a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”.  With very strong job growth in the US and many parts of the economy still doing well, this definition has likely not been met. In addition, GDP data can be substantially revised from the first reading, so it’s too early to declare the US in recession already.
  • On the inflation front, core PCE slowed to 4.4% q/q from 5.2% in Q1, still much higher than the Fed’s target. As a result, we do not expect this initial GDP print to deter the Fed from hiking rates further, when its focus remains on bringing inflation down to 2%. However, the pace of rate hikes is likely to slow from September, depending on economic data in the interim.     
  • In the Eurozone, German inflation (EU harmonized) rose by a bigger than expected 0.8% m/m in July taking annual inflation to 8.5% (previously 8.2%, forecast 8.1%). The main driver was higher food, housing and energy costs. Transport costs likely declined due to government initiatives including cheaper public transport tickets and cuts to electricity charges.   
  • Japan’s CPI accelerated to 2.5% y/y in July, slightly higher than forecast and up from June’s 2.3% reading. Excluding food and energy however, core CPI was up 1.2% y/y. Retail sales growth slowed to 1.5% y/y in June from 3.7% in May and the jobless rate was unchanged at 2.6% in June. Industrial production rebounded sharply last month, up 8.9% m/m but on an annual basis was still down -3.1% y/y.

Today’s Economic Data and Events

  • 13:00 EZ CPI (Jul) forecast -0.1% m/m and 8.7% y/y
  • 13:00 EZ GDP growth (Q2) forecast 3.4% y/y
  • 16:30 US Personal income (Jun) forecast 0.5%
  • 18:00 US University of Michigan consumer sentiment index (Jul) forecast 51.1

Fixed Income

  • US Treasuries rallied sharply in response to the weak US GDP print for Q2 with 2yr UST yields almost showing around 20bps of movement for the whole day. The soft economy numbers will expand expectations that the Federal Reserve will substantially slow down its pace of policy normalization and markets are now pricing in a peak in the Fed Funds rate at about 3.3% in December this year.
  • Yields on the 2yr UST closed lower by about 14bps, settling at 2.8622%, their lowest level since the start of June. On the 10yr, yields fell 11bps on the close to 2.6759%. The inversion in the curve narrowed somewhat overnight to 19bps down as much as 25bps hit earlier in the week.
  • European bonds followed Treasuries higher over the day as the economic outlook is perhaps even worse in the Eurozone than it is in the US. Yields on the 10yr bund fell 10bps to 0.821%, back at levels last seen in May. In the UK the 10yr gilt yield dropped a more modest 5bps to 1.863%.
  • S&P Global Ratings changed their outlook on Pakistan to negative while affirming the rating at ‘B-‘. S&P noted that even if Pakistan is able to access emergency support from the IMF, it will still face financing vulnerabilities.   


  • Currency markets showed some wide intraday moves as market expectations of what central banks will do from here—in the face of much slower economic activity and still high inflation - shifted. EURUSD oscillated between the 1.02 and 1.01 levels, ending the day little changed at 1.0197. GBPUSD was more steadily positive, up by 0.18% to 1.218 overnight while USDJPY benefitted from a strong risk-off impulse to close at 134.27, down 1.7%.
  • Commodity currencies were mixed with USDCAD down 0.14% at 1.2807 while NZDUSD gained 0.4% to settle at 0.6298. AUDUSD closed little changed at 0.6989.


  • Some positive earnings results from some of the biggest tech firms helped shore up equity markets yesterday and there were gains across the board in the big three US indices. The S&P 500 saw the biggest gains as it added 1.2%, followed by the NASDAQ (1.1%) and the Dow Jones (1.0%).
  • The day was broadly positive in Europe also, where the CAC gained 1.3% and the DAX 0.9%, although the FTSE 100 closed flat. 
  • Locally, the ADX dropped -0.1% but the DFM added 1.3% on the day. The Tadawul gained 0.9%.


  • Oil prices closed mixed again overnight with Brent futures up 0.5% at USD 107.14/b and WTI settling lower at USD 96.42/b, down 0.9%. Even as markets grapple with the prospect of a recession, the supply situation around oil remains particularly tight allowing prices to remain relatively high.

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Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

Khatija Haque Head of Research & Chief Economist

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