US GDP declines in Q2
The US economy is weakening much faster than expected. The first look at the second quarter showed another negative reading, which came as a surprise to most on Wall Street. The second quarter advance reading came in at -0.9%, much worse than the consensus estimate of a 0.4% gain, but not as bad as the -1.6% contraction in the first quarter. . A significant slowdown was expected much later, so this second consecutive contraction will complicate the Fed’s plan to aggressively fight inflation. The major hit to growth came from a 2.0% decline in inventories. Consumer spending is slowing, but continues to support modest economic growth.
The United States relies on the National Bureau of Economics to declare a recession, but for many the basic view of a recession is two straight quarters of contraction. What everyone can agree on is that the economy is slowing down pretty quickly and that will keep the pressure on the Fed to tighten as much as possible before it has to go on hold.
The first jobless claims confirmed its upward trajectory but remain at relatively low levels. There is a lot of noise with unemployment insurance claims, especially given the shutdowns of many automakers. The labor market is cooling but remains a bright spot for the economy.
A slower pace of rate hikes will be warranted later this year, but for now the Fed still has a clear signal to proceed with aggressive rate hikes. The debate between a half-point increase and 75 basis points at the September meeting will remain heated until we get the next two inflation reports.
Stagflation is obviously here now and will ultimately force the Fed to make a difficult decision as to when it may need to suspend tightening. The Fed won’t see inflation below the terminal rate anytime soon and that could prompt the Fed to send this economy into a recession much sooner.
Crude prices remained a volatile trade as energy traders digested a startling second straight contraction for the US economy and report that OPEC+ will likely hold output steady or consider a slight output increase. The near-term crude demand outlook looks vulnerable, but significant downward pressure on crude prices seems unlikely as the US economy remains resilient and expectations of a severe recession fall far short of the base case. .
Gold is breaking out now that a peak in Treasury yields is firmly in place. Stagflation is here to stay and that should be good news for gold prices. The US economy is heading into a recession and as long as Wall Street thinks the Fed will slow the pace of its tightening, gold should start to see safe-haven flows again.
Gold’s biggest risk was that the economy remained robust and the Fed might need to be more aggressive with rate hikes. The risk of a full rate hike by the Fed is long gone. Gold will face strong resistance around the 1800 USD level. The run-up to the Jackson Hole Symposium could see gold stabilize between USD 1725 and USD 1800.
Bitcoin has regained its momentum as the peak in Treasury yields appears to be firmly in place. Risk appetite is back after a second straight contraction in the U.S. economy raises the odds that the Fed plans to tighten at a slower pace at the next policy meeting in September. A broad rally for risky assets is great news for crypto, but traders shouldn’t be surprised if this recent market rally eventually wanes.
If the crypto winter is truly over, bitcoin might not break if we see stocks drop their entire post-FOMC and look at Q2 GDP first. Bitcoin is facing tentative resistance at the $24,000 level, but if that cannot contain the bullish price, it could expand towards the $27,500 region.
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