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US GDP Beats Expectations: Is a Rate Cut Off the Table?

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On July 26, the US BEA (Bureau of Economic Analysis) released the advance estimate of second-quarter GDP. The data was better than expected.

US GDP data

The advance estimate showed that the US economy had expanded 2.1% in the second quarter. The growth rate exceeded the 1.8% growth that analysts polled by Reuters were expecting. The US economy’s growth also surpassed expectations in the first quarter, expanding 3.1%.

The economy also registered impressive growth of 4.2% in the second quarter of 2018. However, President Donald Trump’s tax cuts aided the surge. The BEA attributed the current second-quarter GDP growth to “positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment.”

First-quarter GDP

The BEA maintained its first-quarter GDP growth estimate of 3.1%. It added, “Downward revisions to exports, state and local government spending, and private inventory investment were offset by upward revisions to PCE and federal government spending.”

We’ve received several data points this week. Economic data paints a mixed picture of the US economy. US new home sales increased 4.5% year-over-year to a seasonally adjusted annual rate of 646,000 in June. The June durable goods data that came out on July 25 showed a rise of 2%. Both these data points were better than expected. June’s employment data was also strong. However, June’s existing home sales, building permits, and housing starts data have disappointed. Mortgage applications have been weak too despite lower interest rates.

What would the Fed do?

A strong GDP report coupled with reasonably strong economic indicators muddy the rate cut outlook. Earlier this month, even a 50-basis-point interest rate cut seemed possible. However, with the economy showing momentum, the Fed might at best settle for a 25-basis-point rate cut. On July 25, the European Central Bank also hinted at rate cuts, and Turkey has lowered rates too. Global dovishness might influence the Fed’s decision-making process.

President Trump has lashed out at Fed Chair Jerome Powell multiple times recently. Trump sees the Fed’s rate cuts as a dampener for the US economy. Expectations of a rate cut have helped buoy market sentiments. The SPDR S&P 500 ETF (SPY) is up 21.1% for the year. The S&P 500 fell sharply in May amid the escalation in the US-China trade war.

Earnings season

Facebook (FB) and Alphabet (GOOG) both reported better-than-expected second-quarter earnings. However, Amazon’s (AMZN) earnings lagged analysts’ estimates. Apple’s (AAPL) earnings are set for release next week. Big tech companies including Facebook, Apple, Amazon, and Alphabet testified before US lawmakers earlier this month. The European Union is also investigating Amazon for anticompetitive behavior.

Meanwhile, auto stocks have reported dismal numbers. Ford Motor Company (F) and Tesla (TSLA) reported their earnings results on July 24 after the markets closed. Both Ford and Tesla missed consensus estimates and saw selling sprees after their earnings releases. Ford also taunted Tesla with a video for its upcoming electric F-150.

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