The next couple of days sees the release of two data points that are likely the most important for the week as the markets try to figure out where monetary policy is headed. US GDP figures as well as the Fed’s preferred measure of inflation are likely to shake up dollar pairs as the market swivels back to the data.
The two data points point at the core issue that will determine how the Fed will act over the coming months. The Fed believes its policy is restrictive. That means, the interest rate is so high that it is slowing down economic growth. including US GDP growth. But, they also believe it’s necessary to bring down inflation. The intersection of those two factors is that faster economic growth implies prices rise faster. The more the indicators slow, the more pressure on the Fed to cut, and the faster the rate cut pace will be.
A Bounce, or a Trend?
It has already been observed that the US economy has lost steam this year. The first quarter was significantly lower than the prior year. However, there is hope that it was a bit of a “bottom” or outlier, and that the subsequent quarters will be higher. reflecting an improvement in US GDP growth. Indications so far are that the economy will rebound, but won’t reach the same level of growth as last year, despite it being an election year.
One of the factors is that the Treasury has reduced borrowing and is working on reducing the deficit, which means less spending. Less government spending reduces the nominal GDP. Additionally, a stronger dollar would weigh on export prices, which would also translate into a smaller nominal GDP.
What To Look Out For
Advance US Q2 GDP is expected to move back to 2.5% annualized growth, an improvement over the 1.4% prior. Though it’s important to know that this is the first reading, and there will be two more in which revisions can be made. While it’s an improvement over what was considered a dismal first quarter, that would still be below the growth rate seen last year.
At the same time is the release of Durable Goods orders, which are also an indicator for economic health. Given the concurrent release of the GDP number, they could lose some star power. But it is a more forward-looking data series, as it represents planned spending by businesses for infrastructure over the next year. Durable goods are expected to accelerate to 0.3% from 0.1% prior, a sign that the economy might pick up in the second half.
The Main Mover of the Week
The economic growth figure is important because as long as it remains largely positive, it gives the Fed room to keep rates higher. But, inflation moving lower is what will be more significant to convince FOMC members that it is time to cut.
The US Core June PCE price index is expected to stay unchanged at 0.1%, a pace that would bring down the annual rate to 2.5% from 2.6%. While still above target, it is trending in the right direction, which would put the Fed on track for its expected September rate cut.
