Weak Q2 GDP Report Takes Steam Out of Recent Positive US Economic Indicators

This morning it was reported that Q2 GDP grew at a 1.2% pace – well below the +2.5% rate forecast. Q1 GDP was also revised downward, from +1.1% initially reported to a revised +0.8%. The miss to forecast appears to have mostly been the result of reduced investment and spending by businesses, where consumer activity in the quarter remained solid. The market’s response appear to imply this latest softer data may cause the Fed to remain on hold and not move any time soon with the long anticipated rate increases. This makes 3 straight quarters of below 2% US economic growth, which equity pundits note is a stark contrast to the rate of growth in stock valuations over that same time period. Other economic data released today included the GDP Quarterly Price Index which was up 2.2% (vs. +1.9% exp.), Chicago Purchasing Managers printed at 55.8 (vs. 54.0 exp.) and the July U. of Michigan Index which came out at 90.0 (vs. 90.2 exp.).

Overseas, details released by the Bank of Japan regarding new monetary stimulus fell below expectations and sent the Yen higher against major currencies. Eurozone GDP estimates were also released overnight, showing Q2 growth of 0.3%, after Q1 growth in the region of +0.6%.

US term rates are down 3-5 basis points across the curve, with the 10 year Treasury yield back below 1.50% for the first time in 3 weeks at 1.46%. This move further down in yields on the long end of the yield curve is taking place while US money market rates, including 1 to 12 month LIBOR, creep ever higher, pushed in part by new regulations reducing the appeal of short-dated credit products for US money funds. This massive flattening trend has increased the attractiveness of forward started hedging for borrowers with future term funding needs.