Risk Assets Still Rallying on Bad News for Now, Until It Gets Really Bad
Risk trades have been suffering during this month after seeing some positive economic numbers, which should have been the opposite in normal times. But, the FED is leaving the rate hike policy at the mercy of the economic data as Powell reiterated at the Jackson Hole Symposium. But, the economic numbers from the US have been showing a slowdown in recent weeks, which has been weighing on the USD and helping risk assets make a bullish reversal.
It appears that the Federal Reserve’s desired outcomes are unfolding, although one could make the case that these effects are manifesting more forcefully and swiftly than initially anticipated. This raises the question of the pace at which the Fed will proceed with rate hikes. Many observers believe that Powell might advocate for maintaining higher rates for an extended period during the Jackson Hole meeting, a stance that might not sit well with the market. Concurrently, the market might remain skeptical of Powell’s stance, maintaining the belief that the Fed will ultimately resort to rate cuts as the unemployment rate climbs.
Nonetheless, the current market sentiment suggests that more weakness is on the way for the US economy. The US dollar has experienced a significant retreat this week. Even the resurgence in Oil prices is occurring, a trend that might appear counterintuitive amidst an economic deceleration. But this is due to the idea of the FED hiking again diminishing further as the economy cools but stays afloat in a soft lending. But if it gets too bad and a recession becomes more evident, then the real trouble will start.
US Q2 GDP Report Prelim (2nd) Reading
- The Q2 prelim GDP +2.1% vs +2.4% expected
- The advance Q1 reading was +2.4%
- Final Q1 reading was +2.0% annualized
- Q4 was +2.6% annualized
Details:
- Consumer spending +1.7% vs +1.6% advance
- Consumer spending on durables -0.3% vs +16.3% prior
- GDP final sales +2.2% vs +2.3% advance
- GDP deflator +2.0% vs +2.2% advance
- Core PCE +3.7% vs +3.8% advance
- Exports -10.6 vs -10.8% advance
- Imports -7.0% vs -7.8% advance
- Business investment +3.9% vs +4.9% advance
- Corporate profits -10.6% vs -5.9% advance
No changes on any of the metrics were expected.
Percentage point changes:
- Net trade -0.12 pp vs -0.12 pp advance
- Inventories -0.09 pp vs +0.14 pp advance
- Govt +0.58 pp vs +0.06 pp advance
State and local government spending has been a strong tailwind over the past year, adding about 0.5 pp per quarter. That should come to an end soon.
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