Yesterday’s data was stronger than expected. Second quarter GDP expanded by 3.0% versus a 0.5% decline registered during the first quarter. The data has been heavily skewed by trade and tariffs. Net exports added 5 percentage points to GDP after subtracting the most on record in the first three months of the year according to government statistics.
Beyond the recent tariff-related swings, second quarter economic activity was moderate. Consumer spending—which accounts for about two thirds of GDP– advanced by 1.4% after rising by just 0.5% during the first quarter.
The inflation indices of the data largely met expectations, declining from the previous quarter’s levels.
The ADP Private Sector Employment Survey—formerly a top tier indicator but has now lost a lot of its luster—indicated that private sector payrolls increased by 104,000 far eclipsing the 76,000 expected increase, a strong rebound from the prior month’s decline.
This data point had a strong correlation back to the BLS Employment report, but the relationship has been strained for several years. However, the data increases the odds that there will not be a downside surprise in Friday’s government released employment report.
Treasuries initially sold off on the data, however some believe the selloff can be partially attributed to the Treasury’s decision to continue to fund the country’s massive debt with short-term treasuries, far exceeding any recommended levels. The Administration [as does most market participants] think short-term interest rates will be considerably lower in the next 12-24 months.
However, what happens if they don’t decline? Finance 101 dictates that you never finance long-term commitments with short-term obligations. But whoever thought Washington followed the rules/guidelines that were established for/by the private sector.
At 2:00 the FOMC released its post meeting statement which sparked a rally in the short end of the Treasury market causing the yield curve to steepen. However, the short end later again sold off to earlier day levels.
As widely expected, the Committee kept rates unchanged and nominally tweaked its outlook on the economy. The media, however, zeroed in that two members dissented desiring a 25-bps cut, the first time two members have dissented since 1993.
Their dissention, however, was already telegraphed. Both members had strongly inferred that they would be desirous of an interest rate cut now. Social media et.al perhaps made a mountain out of a small ant pile.
I guess this falls under the guise of don’t let the truth destroy a good story or narrative.
The post meeting press conference offered little new information, stating any rate cut in September will be data dependent. Fed funds futures suggest about a 60% cut at the September meeting, almost unchanged from the previous day.
Equites were initially little moved by the outcome but came under moderate selling pressure perhaps on the realization that a September rate cut is not a done deal.
The markets are also entering into a period of seasonal weakness as August and September are historically down months.
After the close, both META and MSFT released earnings that exceeded expectations by a wide margin, sending shares higher by 12% and 8%, respectively. MSFT is now the second $4 trillion company.
Wow! Is this a speculative blow off or will these exponential increases in value continue that perhaps morphs economic reality? NVDA and MSFT are now worth over 7.2% of global GD and over 15% of the S & P 500..
Last night the foreign markets were mixed. London was up 0.36%, Paris down 0.33% and Frankfurt down 0.10%. China was down 1.18%, Japan up 1.02% and Hang Seng down 1.60%.
Dow and NASDAQ futures are up 0.25% and 1.25% on MSFT’s and META’s big profit beat. The 10-year is up 6/32 to yield 4.35%.
