US Advance GDP To Show Slower Q2 Growth

The US Department of Commerce will be releasing its first advanced GDP estimate report. The data covers the three months ending June. Expectations point to a 1.8% increase in the GDP for the period.

The preliminary release of the GDP report will see the markets reacting. The data comes ahead of next week’s FOMC meeting. The Federal Reserve is widely expected to cut rates when it meets in July.

The quarterly period saw a bit of turbulence especially as US and China trade wars escalated quickly. Payrolls were also rather mixed during the three month period, underlining the weaker GDP growth expectations.

What are the General Estimates on the GDP?

Various GDP models are forecasting a median increase of 1.5% on the quarter ending June. The highest estimate is for an increase of 2.0% while the average consensus points to a 1.7% increase.

From this, we could state that the expectations for the GDP to rise is somewhere between 1.5% to 1.7% for the quarter ending June 2019. But economists polled by Reuters forecast that the US economy will rise by about 1.8% in the quarter ending June 2019.

If the GDP numbers come within the estimated ranges, it is likely that the pace of growth would be the slowest since the first quarter of 2015. The US GDP grew at a pace of 1.5% back then.

Impact of the Advance GDP Report on the Markets

Investors will be looking closely at the advance GDP report coming out as it will influence the Fed’s monetary policy.

The markets have heavily discounted a rate cut at the July Fed meeting. According to the CME Group’s Fed funds rate, the probability of a 25 basis point rate cut is about 65%.

The Fed funds rate currently is at 2.25%-2.50%. This rate cut comes as a pre-emptive move from the Federal Reserve. The central bank is known for moving too slow in the past.

As a result, this quarter basis point rate cut is seen as a way to enable the US to continue the steady pace of growth. It is also seen as a way to avoid a recession in the US economy.

While historically, the advance GDP reports are often subject to change in the subsequent releases, the initial impact will be strong.

While the markets are discounting a rate cut, a surprise beat on the estimates could make things complicated. However, the bar for the Fed to keep rates steady is rather high.

This is likely if the US economy sees a 2.5% or a higher growth rate. But given the recent trends in various indicators, the probability of a higher GDP growth rate (higher than the first-quarter growth rate) is low.

What Markets to Watch During the GDP Release?

The equities, bonds and the currency markets will clearly feel the impact of the GDP release. The US equity markets touched new all-time highs right at the start of the corporate earnings season.

The rise in the equity indices came on the back of Fed Chair Jerome Powell reiterating the dovish view from the central bank. With the markets already discounting the rate cut, it will be interesting to watch how the equity markets react.

The US dollar is also one to watch for. The Washington Administration has expressed its preference for a weaker currency. With the Fed lowering rates, the US dollar might start to lose some strength. But it is a lot more complex than just the Fed funds rate playing a role.

The volatility in USD can be seen in the major currency pairs.

Finally, the yields in the US Treasuries have been steadily falling since early 2019, after reaching a high just above 3.20. The data infers that the markets have been discounting the Fed to cut interest rates for a while.