U.S. 2Q GDP Report Heads Crowded Data Release Schedule Today

July 28, 2022

U.S. real GDP fell 1.6% on quarter at an annualized rated during the winter period and is expected to rebound only about 0.5% in 2Q. The data will be released shortly.

Meantime, the dollar strengthened overnight, especially in the past couple of hours. From Wednesday closing levels, the dollar is up 0.8% against the euro, 0.4% on a weighted basis, 1.9% relative to the Russian ruble, 0.3% versus the Swiss franc, Australian dollar and sterling, and 0.2% against the Mexican peso.

Investors apparently were expecting Powell to invoke the R-word as in recession at yesterday’s meeting. Instead, he expressed optimism that a downturn could be avoid and expressed the opinion than the United States is not currently in a recession or headed for one imminently. Fact is that central bankers virtually never predict a recession and only cite one when it’s mostly past. Powell also inspired hopes that the size of future rate hikes would not be as big as the last two and that every upcoming meeting wouldn’t necessarily produce a needed rate hike. It was enough to trigger a stock market rally in yesterday’s final hours of trading.

U.S. stock futures are down today ahead of the GDP report but only slightly. Stock markets overnight rose 1.9% in India, 1.7% in New Zealand, 1.0% in Australia, 0.9% in Indonesia, 0.4% in Japan but only 0.2% in China. Xi and Biden will speak by phone today. Italy’s stock market shows a gain of 1.2%, while those in Germany, the U.K., and France are barely changed.

A U.S. Senate deal to address climate change has been apparently worked out after all.

The 10-year Treasury yield dipped a basis point, whereas comparable yields in Germany and Japan firmed a basis point.

Prices for WTI oil, gold and Bitcoin are up today by 2.0%, 1.0%, and 0.5%.

The above market changes reflect a snapshot taken shortly before the U.S. GDP report was released. In response to a weaker-than-expected figure (see review), the dollar gave up ground, equities rose, and the 10-year Treasury yield fell sharply.

German consumer price inflation decelerated to 7.5% in July from 7.6% in August and the recent peak of 7.9% in May. Analysts were actually anticipating a somewhat bigger downtick, but the month-on-month price change rebounded to 0.9%. And at 7.5%, on-year inflation is still six percentage points above the mid-2021 1.5% level.

French producer prices in June advanced 1.3% on month and 27.0% on year, almost as fast as the recent 28% high hit in April. In the previous year through June 2021, the PPI had risen 7.5%.

South African producer prices rose 2.1% on month and by a record 16.2% on year in June.

Belgian consumer price inflation in July dipped just 0.03 percentage points below October’s 476-month high.

Australian import prices jumped 22.1% in the 12-month period through 2Q 2022, most in 146 calendar quarters.

Euroland’s economic sentiment index weakened significantly more than forecast in July to a 17-month low of 99.0 from 103.5 in June, 114.0 in February, and a record high of 118.0 set exactly one year earlier in July 2021. Sentiment in manufacturing, services and retail fell on month by 3.5, 3.4, and 1.6 points, while construction slid only 0.4 index points. Consumer confidence matched the preliminary record low reading of -27.0 versus -9.6 in February just before Russia invaded Ukraine. The labor market index dropped almost 3 whole points and at 107.0 was down from February’s record high reading of 116.5.

JUST IN: As some had speculated, the first estimate of U.S. GDP in the second quarter posted a second consecutive quarter-on-quarter decline, this time of 0.9% after a 1.6% slide in the first quarter. If this had been accompanied by falling employment, which emphatically has not been the case, it would be a strong signal that the United States is in a recession. What is happening is that economic growth is losing steam more quickly than had been anticipated. Year-on-year growth fell to 1.6% in the spring from 3.5% in 1Q 2022, 5.5% in 4Q 2021, and 12.2% in the second quarter of 2021. Personal consumption expanded only 1.0% on quarter, down from 1.8% in 1Q. Business non-residential investment collapsed from a robust gain of 10.0% in 1Q to a dip of 0.1% last quarter. The highly interest-sensitive residential construction sector plunged 14.0% last quarter, and government spending (-1.9%) recorded its fourth quarterly drip in the past five quarters. Net exports enjoyed a robust bounce-back and augmented GDP growth by 1.4 percentage points, but a great amount of demand was met out of inventories rather than new production. The change in inventories exerted a 2.0 percentage point drag on GDP growth and was the single largest negative GDP driver.

The total U.S. personal consumption expenditure price deflator had the same underlying 7.1% quarterly rise annualized as it did in 1Q, but the core PCE deflator slowed to a 4.4% pace from 5.2%. Compared to the same quarter a year earlier, the PCE price deflator rose 4.8%, down from 5.2% in 1Q, while the overally PCE price index continued to crest, reaching 6.5%.

Russia’s invasion has had a profoundly adverse effect on economic confidence and retail sales in many countries.

  • South Korean business confidence dropped to a 21-month low in July. At 80, it was down from a reading of 95 at the end of 2021.
  • Turkish business confidence fell to a 14-month low of 93.4 in July versus 103 last September.
  • Swedish business confidence printed at a 16-month low of 108 this month versus 119.3 last October.
  • Danish business confidence matched Junes 19-month low of -9 compared to +10 last October.
  • Dutch business confidence ticked up 0.3 points above June’s 14-month low of 8.1 but was still 4.3 points lower than last November.
  • Portuguese business confidence hit a 10-month low this month, and comparable Finnish and Spanish measures were at 16- and 17-month lows.
  • Swedish consumer confidence crashed to a 352-month low of 54.1 in July from 66.5 in June and 119.3 last October.
  • Portuguese consumer sentiment (-31.1 in July) was almost as weak as the 23-month low of -34.1 in March.
  • Australian retail sales rose on month throughout the first half of 2022, but the increase of 0.2% was the smallest increase in that streak.
  • Spanish retail sales dipped 0.1% on month for the second straight time in June and was only 1.0% greater than a year earlier.
  • Danish retail sales dropped 3.2% in June, the biggest decline in six months. This resulted in a 9% on-year slide.
  • Swedish retail sales (-1.2%) was also the biggest monthly decrease in six months. A 3.6% on-year decline was the most since at least 1995.
  • Irish retail sales fell 1.3% on month and 6.6% on year, which was the biggest such drop in 17 months.

Belgium and Sweden also reported second-quarter GDP figures. A 0.2% rise in Belgian GDP from 1Q was a double analyst expectations, but year-on-year Belgian growth still slowed to 3.3% in 2Q from 4.9% in 1Q and 15.2% in the second quarter of 2021. Swedish GDP rebounded from a 0.8% quarterly contraction in 1Q with a 1.4% rise in 2Q that widened year-on-year growth to a two-quarter high of 4.2%.

The United States is not the only economy where labor markets are performing better than spending and production. The Greek jobless rate fell to a 12-year low of 12.5% in May. Mexican unemployment stayed at 3.3%, defying expectations of an uptick in June. Norway’s jobless rate likewise remained unchanged last quarter from the 37-quarter low of 3.3% in 1Q.

U.S. jobless insurance claims fell 5k last week to 256k.

As was to be expected, the Hong Kong and Macau Monetary Authorities followed suit after the Federal Reserve’s 75-basis point interest rate hike. Hong Kong monetary policy is subordinated to an exchange rate target against the U.S. dollar, while officials in Macau keep their currency linked to the Hong Kong dollar. Policy rates in Hong Kong and Macau are now at 2.075% and 2.75%, respectively.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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