Trading with point and figure

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Ostwald, Marc
14:51 (2 minutes ago)
to Marc
US Q2 advance GDP thoughts - "As expected strong headline requires more detailed inspection"

- Overall this was much too close to expectations at 4.1% SAAR to give a short in the arm to sleepy financial markets, which are sadly fixated on their daily dose of Trump Twitter. The details were on balance marginally better for H2 prospects than projections suggested, even if the army of Cassandras will doubtless find enough to predict recession for the US by the end of the year, or at the very least during H1 2019, and then blame the Fed, and failing all else, talk up downward revisions (generally not as big a risk for Q2 as for Q1 or Q4)

a) Personal Consumption - at 4.0% this was a stronger than the expected 3.0 % rebound, from Q1's downwardly revised 0.5% (vs. 0.9%), but averages the two quarters at a solid 2.0%, in principle 'not too hot and not too cold'. In the details, a rebound in Durables spending that contributed 0.6 ppt (after a -0.2 ppt in Q1), to which Autos only contributed 0.2 ppt, was matched a pick-up in Non-Durables spending (also 0.6 ppt). There will be many who point to the weakness in Housing Investment -1.1% q/q SAAR following a downwardly revised -3.4% in Q1. But a look at that in terms of contribution to overall GDP underlines how relatively insignificant a contributor to GDP Housing Investment is, above all by comparison to the 2000s, i.e. Q2 drag as a 'whopping 0.04 ppt following Q1's -0.14 ppt. This is not a game changer, even if rising mortgage rates are weighing on housing affordability.

b) Business Investment - A 7.3% SAAR after an upwardly revised 11.5% (from 10.4%) in Q1, there is plenty of momentum here, even if much of this may be coming from oil related sectors. In the breakdown, Equipment Investment lost momentum 3.9% SAAR (0.2 ppt contribution), but this follows 8.5% SAAR in Q1 ,and a steady 0.5/0.6 ppt contribution to GDP for the past 5 quarters. Investment in Structures at 13.3% SAAR again very solid, though in contributive terms at the same pace as Q1 0.4 ppt. Overall the "core" Private Sales to Domestic Buyers measure was stronger than anticipated 3.9% SAAR (Q1 1.9%, 2017 2.5%)

c) Inventories / Trade - The irony in today's data is that the well-advertised big boost to GDP from Net Exports at 1.0 ppt (Exports 9.3% q/q, Imports 0.5%) was completely offset by a 1.0 ppt deduction from Inventories, which follows a modest positive contribution in Q1 of 0.3 ppt that followed Q4's -0.9 ppt and Q3 -1.0 ppt. While inventories are therefore likely to make a decent contribution to Q3 GDP, the relative unknown is how much 'beat the tariffs' activity in Q2 has 'borrowed' export demand from Q3.

d) Govt spending - There was some speculation that Govt spending might also give a substantial boost to Q2 GDP, but at a 0.4 ppt contribution was only slightly higher than 0.3 pt in Q1, and the same as Q4 2017.

e) Deflators - a mixed bag, though the higher GDP deflator at 3.0% vs. forecast 2.3% (Q1 2.0%) was mostly accounted for by energy, as also underlined by the Core PCE deflator missing at 2.0% (vs. Q1 2.2%).

"Take homes": Trump will doubtless spin this in his favour (a myth, but markets are not bothered), while the Fed which meets on Tuesday and Wednesday will view the report as being very much in line with its current view of the economy. Markets can now re-focus on the Monday / Tuesday BoJ meeting.

(Tables below SAAR rates and ppts contributions to GDP)

..........................................................................

Marc Ostwald
Global Strategist
ADM Investor Services International
 
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