Second quarter GDP rose at a 2.4% annualized rate, above the consensus view of 1.8%. The GDP deflator rose at a 2.2% rate, well below the consensus of 3.0% and the core rate was 3.8% also below the 4.0% expected rate.
Perhaps the most striking aspect of the data is that inventories only added 0.14% to growth thus suggesting there is no inventory restocking and businesses remain negative on tomorrow’s potential growth.
Also of possible significance is that business invest rebounded strongly up 7.7% after just a 0.6% Q1 rise. Spending on equipment surged by 10.8% after falling by 8.9% in Q1. Construction rose 9.7%.
Wednesday the FRB Chair Powell stated that a recession in 2023 is no longer a base case. The data supports such an assertion as the components listed above are longer lasting trends.
Following the release of the GDP, a CNBC headline read “GDP rose by 2.4%. The Recession All Forecasted May Not Occur.”
As noted several times, there have been 13 post WWII recessions, none of which were predicted. Conversely every forecasted recession has not occurred. To date, 2023 is following the traditional path.
Monetary policy is now restrictive based upon a 3.8% core deflator rate. Many believe inflation will re accelerate for the remaining of year for a myriad of reasons including a period of easier comparisons is over, the increase in oil and food and lofty OER.
It is against this backdrop is perhaps the reason the Fed has indicated the overnight rate may remain around current levels until “well into 2024.”
Equities led by the technologies advanced on the data but only staged a mid-day reversal as interest rates began to spike. The catalyst for the spike in yields was perhaps the realization that the Fed is not yet done raising rates to a rumor that the Bank of Japan may discuss “tolerating” higher bond yields.
At market closing, the 10-year rose in yield by 15 basis points to a 4.03% yield. The NASDAQ reversed a 2% gain to close lower by 0.56%.
The velocity of change is incredible.
What will happen today?
Last night the foreign markets were mixed. . London was up 0.06%, Paris down 0.23% and Frankfurt down 0.06%. China was up 1.84%, Japan down 0.40% and Hang Seng up 1.41%.
Dow and NASDAQ futures are up 0.20% and 0.60%, respectively ahead of the release Personal Consumption Expenditure Index, a closely followed inflation indicator of the Federal Reserve.
The 10-year is up 10/32 to yield 3.98%. Markets are digesting the Bank of Japan’s, the only major central bank not to have begun reversing ultra-easy monetary policy, new policy that the 0.5% cap on interest rates is now only regarded as reference point rather than a rigid target.
