US GDP disappoints despite consumer resilience
The desk interprets the recent US GDP report as a clear signal of economic cooling, which may prompt a reevaluation of Federal Reserve rate hikes going forward. As per the full note source, the GDP growth came in at an annualized rate of 1.5% for Q2, below the anticipated 2%. This, alongside softer inflation metrics, suggests maintaining a back-foot position for the US dollar as traders digest the implications for future monetary policy. Additional consumer resilience noted within the report, particularly a 3.2% increase in consumer demand, may provide a buffer but also raises concerns over declining household savings rates. Without any immediate high-impact events on the economic calendar, focus will likely shift to upcoming releases that could further inform the dollar’s trajectory.
What the desk is arguing
The desk frames this as a pivotal moment for US monetary policy, with disappointing GDP growth and cooling inflation suggesting a Fed pivot away from aggressive interest rate hikes. The 1.5% growth rate reported aligns the US economy closer to the Eurozone, with investor sentiment moderating in response to these developments.
Significantly, while consumer demand exhibited a robust 3.2% expansion following the previous quarter's 0.5%, it raised concerns as the household savings ratio dipped to 2.7%. This interplay between growth and risk signals a delicate balance ahead for the Fed.
Where it sits in our coverage
Our internal coverage shows an aligned target at 1.075, with the following consensus from key firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Given the desk's outlook for weaker dollar performance, the current positioning remains cautiously at the lower bound of consensus, potentially influencing speculative strategies in currency markets.
How other firms see it
In line with our view, jpmorgan and similar firms see a potential for dollar depreciation given the GDP slowdown, while bofa maintains a contrarian projection with a more bullish USD outlook. This divergence underscores the uncertainty surrounding US monetary policy and its global ramifications.
Market watchers should closely observe the EUR/USD trajectory as it could reflect sentiment shifts in line with the Fed's decisions, affecting broader risk appetite across currency pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US GDP growth for Q2 fell short at 1.5% vs. 2% consensus, leading to potential Fed pivot.
- 02Consumer spending surged 3.2%, but household savings fell to 2.7%, raising caution.
- 03Lower GDP and inflation numbers are softening the dollar’s position in the market.
Market implications
Keep an eye on USD reaction to upcoming economic data; a sustained move below 1.075 against EUR could signal more bearish forecasts for the dollar. Investor sentiment could pivot based on retail sales or consumer sentiment reports in the following weeks.
Risks to this view
A sudden uptick in consumer inflation could shift Fed rhetoric back towards hawkish policy, negating the current bearish outlook on the dollar. Additionally, stronger-than-expected employment data may also compel reconsideration of interest rate decisions.
Articles US GDP disappoints despite consumer resilience Published 14:03 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The US economy expanded at a slower-than-expected 1.5% annualised rate in the second quarter, but the details highlighted a resilient consumer and ongoing strength in investment. Inflation numbers were also softer than anticipated, resulting in a further cooling in Federal Reserve interest rate hike expectations James Knightley Softer GDP growth and cooler inflation in the US suggest the Fed may not need to hike rates 1.5% Q2 US GDP growth Lower than expected Cooler growth and inflation weigh on rate hike expectations Today's US macro data is, in general, softer than expected. Second-quarter GDP growth came in at just 1.5% annualised versus the 2% consensus (so pretty much matching the eurozone GDP growth number), while the core PCE deflator saw prices rising 0.1% month-on-month versus the 0.2% expected.
That combination of cooler activity and more modest near-term price pressures is helping to maintain the yield curve steepening trends set in motion by Federal Reserve Chair Kevin Warsh’s press conference yesterday, while keeping the dollar on the back foot. US real GDP levels back in line with the pre-Covid trend Source: Macrobond, ING "> Source: Macrobond, ING Details highlight strong domestic demand That said, the GDP details look better than the headline suggests. There was a strong rebound in consumer demand with growth of 3.2% ann. versus 0.5% in Q1, but this did come at the cost of a further decline in the household savings ratio to just 2.7%.
Investment continues to grow nicely, with tech investment still leading the way, although non-tech business investment also showed renewed vigour. Even residential investment made a positive contribution after a torrid run. It was a run-down in inventories (subtracting 0.7ppt from the headline GDP growth rate) and a big jump in imports that proved big drags on growth – both tied to frenzied spending in the tech sector.
Government spending fell by 0.8%, which is likely a legacy of the huge swings seen over the previous two quarters linked to the prolonged government shutdown late last year. Non residential private fixed investment - tech versus non-tech (YoY%) Source: Macrobond, ING "> Source: Macrobond, ING Inflation data shows improvement The softer core PCE deflator is encouraging, offering further justification for the Fed’s no-change decision yesterday. We will have major changes to the calculation methodology when the August print is published at the end of September, tied to the measurement of portfolio management fees, computer software and legal services, which could potentially subtract 0.2ppt from the year-on-year inflation rate.
In any case, we expect cooling housing costs and weak wage growth to help keep inflation in check, with tariff refunds being a major boost to corporate cash flow that mitigates cost pressures elsewhere. A de-escalation in the Middle East that yields lower energy prices would also amplify disinflationary trends through the second half of the year. As such, we still think the Federal Reserve’s most likely course of action is a prolonged pause.
US Inflation GDP Federal Reserve Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York.
He joined the firm in 1998 in London and has been covering G7 and Western European economies. He studied economics at Durham… In this article Cooler growth and inflation weigh on rate hike expectations Details highlight strong domestic demand Inflation data shows improvement
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