US GDP picks up, due to a rebound in consumer spending
US GDP growth accelerated to 2.6% qoq (annualized rate) in Q2:17, following a weak outcome of 1.2% in Q1:17. Stronger growth has not led to higher inflation, so far, with core PCE down to 0.9% qoq (annualized rate) in Q2:17, from 1.8% in Q1:17.
Thus, against the backdrop of benign inflation and resilient economic activity, the Fed maintained its policy stance unchanged at its July 25-26 meeting, and kept the target for the Federal funds rate at 1.0-1.25%.
The Fed is expected to proceed with its balance sheet normalization programme “relatively soon” (likely to be announced in September). Investors will be monitoring closely the discussions at the Jackson Hole Economic Symposium on August 24-26 for further details.
The euro area economy continues a solid upswing. Regionally, Spain’s GDP rose by 3.6% qoq (annualized rate) in Q2:17, the highest pace in almost two years, and the French economy expanded by 2.2%. Overall, euro area GDP growth accelerated to 2.3% in Q2:17 from 2.0% in Q1:17.
Overall, improving economic conditions, with a steady decline in the unemployment rate (-1.0 pp yoy at 9.1% in June, an 8-year low – see graph) and rising core inflation (1.2% yoy in July, a 3-month high), provide room for the ECB to gradually reduce the pace of its monthly asset purchases, likely to start in Q1:2018.
The Bank of England is expected to remain on hold on Thursday (policy interest rate at 0.25%), likely with a majority of 6-2 votes vs 5-3 in June, amid decelerating growth (1.2% qoq annualized rate on average in H1:17 down from 2.4% in H2:16 – see Economics Section) and decelerating inflation (+2.6% yoy in June from 2.9% in May).
Global equity markets were flat on a weekly basis (MSCI World: +0.1% wow in $ terms, +12% YtD). Euro area stocks rose slightly (EuroStoxx: +0.2% wow, +7.3% YtD), with banks overperforming (+3.1% wow, +16% YtD), as steeper bond yield curves support profit margins (Germany’s Bund 10/2-year spread: +8 bps wow at 122 bps).
The US earnings reporting season for Q2:2017 continues on a positive note. Of the 290 S&P500 companies that have reported so far, 73% have exceeded analyst EPS estimates, with reported growth of 10.8% yoy from 14% yoy in Q1:17.
Earnings reports in the euro area have been mixed, with around half (51%) of Q2 EPS releases surprising on the upside, and EPS growth at 8% yoy in Q2:17 from 20% yoy in Q1:17. Financials have had a constructive presence, so far (60% positive surprises, +9% yoy EPS growth).
A largely dovish Fed stance and domestic political developments reinforce recent US dollar softness. Indeed, the USD ended the week at its lowest level since May 2016 in trade-weighted terms (-7% YtD), having weakened by 0.8% wow against the euro to $/1.175 (-11.7% YtD). The euro also continues to gain against the Swiss Franc (see page 3).