Upward GDP means more tightening policy?
In the last week of the first half of the year, the US stock market reached a new high, with $Apple(AAPL)$ surpassing a market capitalization of 3 trillion dollars, becoming the main driving force behind the market's rise. However, excellent macroeconomic data may be the primary reason for investors' sustained optimism.
Two revised financial indicators have further improved the situation: Q1 US GDP, with a quarterly annualized growth rate revised from the previous 1.3% to a final value of 2%, far exceeding the market's expectation of 1.4%; and Q1 US Core PCE Price Index, with a slight downward revision in the quarterly annualized growth rate to 4.9% from the previous 5.0%, and a slight downward revision in the quarterly annualized growth rate to 4.1% from the previous 4.2%.
Regarding GDP, the previous quarterly growth rate of 3.8% was adjusted to 4.2% due to a further increase in consumer spending, marking the highest single-quarter growth since Q2 2021. As is well known, consumer spending accounts for a high proportion of US GDP, approximately 70%. Therefore, it contributed to approximately 2.8% of the GDP growth in Q1. Among them, there was a significant upward revision in service consumption data, durable goods consumption remained expansive, contributing approximately 1.3 percentage points to GDP growth. The easing of automobile supply bottlenecks, coupled with a decline in gasoline prices, stimulated residents' demand for cars.
In terms of imports and exports, Q1 saw an upward revision in exports and a downward revision in imports, resulting in net exports contributing 0.6 percentage points to the overall GDP growth rate. The growth rate of commodity imports was lower than before, which manifested as additional positive contribution to GDP growth, while the contribution of commodity exports benefited from the narrowing drag caused by service exports.
In terms of investment, the durable goods order volume for May, announced last week, increased by 1.7% compared to the previous month, exceeding the expected -0.9%. The growth rate for April was also revised from 1.1% to 1.2%. Durable goods orders have been growing for three consecutive months.
Regarding consumer confidence, the June Conference Board Consumer Confidence Index, announced last week, exceeded expectations, rising to 109.7, reaching a year and a half high and surpassing the market's expectation of 104. This indicates that consumers have a more optimistic outlook on the labor market and job prospects, and their expectations for their financial situation have strengthened.
Furthermore, the US real estate data released last week exceeded expectations, with new home sales, building permits, and housing starts rebounding. The annualized new home sales for May reached 763,000, reaching the highest level since February 2022, with a month-on-month growth rate of 12.2%, the largest increase in a year.
As economic data improves, US Treasury bond yields have risen, with the 10-year US Treasury yield surpassing 3.8%. This may indicate a change in market expectations regarding interest rates.
Will the expectations for rate hikes continue to grow?
With the increase in inflationary pressures and strong economic data, US interest rates may remain at high levels for a longer period. For the Federal Reserve, the rebound in the real estate industry may further strengthen monetary tightening.
Housing data unexpectedly strengthened in May, and we believe it may be related to the significant increase in rental sub-items of the Consumer Price Index (CPI). The high rental environment is also prompting more residents to turn to homeownership, and the rising cost of renting has provided landlords with higher returns. Previously, we anticipated that the excess savings accumulated by US households during the pandemic would be depleted by early 2024, so there seems to be some time lag at the moment. After that, sustaining upward housing demand may become more challenging.
How is the market reacting to the possibility of interest rate hikes?
Due to better-than-expected performance of the US economy, expectations for the Federal Reserve to resume interest rate hikes in July have increased, resulting in pressure on various currencies, including the renminbi. Although GDP indicators are somewhat lagging, as long as this momentum is maintained, expectations for rate hikes will likely intensify at the FOMC meeting. The market currently anticipates the pricing aspect (an increase in the central interest rate), but the demand for assets remains high.
The direction of US monetary policy after July will require more signals to emerge, and this week the following should be monitored:
- Release of minutes from the Federal Reserve's monetary policy meeting (Thursday)
- Initial jobless claims
- US June ISM Non-Manufacturing PMI
- Release of US June unemployment rate (Friday) and seasonally adjusted non-farm payroll
- Speeches by some Federal Reserve officials.
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