U.S. GDP, ECI Both Miss; Yields, Dollar Plunge

So obviously U.S. GDP is the biggest econ print of the day.

Of course in terms of the Fed’s reaction function and markets more generally (and do note that thanks to the increasingly reflexive relationship between the FOMC and market participants, the former’s reaction function is becoming indistinguishable from the latter’s behavior), it takes a backseat to inflation and jobs data. In that regard, the ECI number is probably more critical. Here are the estimates and priors:

  • 8:30am: GDP Annualized QoQ, est. 2.7%, prior 1.4%
  • 8:30am: Personal Consumption, est. 2.8%, prior 1.1%
  • 8:30am: GDP Price Index, est. 1.3%, prior 1.9%
  • 8:30am: Core PCE QoQ, est. 0.7%, prior 2.0%
  • 8:30am: Employment Cost Index, est. 0.6%, prior 0.8%

And here are the numbers, just out:

  • U.S. ECONOMY EXPANDED AT 2.6% PACE IN 2Q; EST. 2.7%

GDP

Growth

  • U.S. Second Quarter Employment Cost Index Rose 0.5%; Est 0.6%
  • Est. range 0.4% to 0.8% from 54 economists
  • Prior quarter revised to plus 0.8%
  • Wages rose 0.5% q/q
  • Benefit costs rose 0.6% q/q

So misses across the board, although consumer spending came in on target at 2.8%, which is nice.

Anyway, the reaction was swift:

Yields

Dollar

A GDP beat would have been great news for Donald Trump, as it would allow him to find a headline that he can tweet alongside a #MAGA hashtag.

What you want to try and analyze with this morning’s print is the extent to which it does or doesn’t support the “divergence” narrative that was supposed to underpin the dollar headed into 2017.

That is, if you’re a trader, this all needs to be viewed through the lens of Europe versus the US and whether the incoming data supports the current trajectory of policy normalization.

Earlier today we got upbeat CPI data out of Germany (full story here) and that caused an immediate move higher in bund yields:

Bunds

Needless to say, Treasury yields went along for the ride:

10YYield

This further supports the narrative that Europe is doing a lot better than the US and when you consider that the Europeans have cleared most of their biggest political hurdles while Washington is still frozen in time, you’ve got a pretty good argument against the notion that the Fed will be able to move faster than the ECB. Of course the Fed has a head start, but that’s the whole point: the policy divergence is probably going to narrow in the absence of a sudden upturn in the US data.

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