This week featured key data points for gauging the health of the US economy. The first estimate for second quarter GDP came out higher than expected at 2.8%, beating consensus expectations calling for 2% and 1.4% growth in Q1. The strong reading was driven by auto inventories as car dealerships grappled with a software cyberattack, along with an uptick in business capital expenditures. Personal consumption grew at 2.3%, mostly due to outlays for necessities such as health care, housing, and utilities.
This morning’s Personal Consumption Expenditures (PCE) inflation report for June indicated that US prices rose 0.1% from the previous month and 2.5% year-over-year. Core PCE, which excludes the volatile food and energy sectors and is closely watched by the Federal Reserve (Fed), rose 0.2% month-over-month and 2.6% over the past year. This is still slightly higher than the Fed’s 2% y/y target but provides confirmation that inflation is moderating and clears the way for a potential rate cut at the September FOMC meeting. Personal income and spending both came in lower in June, with income rising only 0.2% and spending decelerating to 0.3% versus May, reflecting weakening financial health of the US consumer. Spending on goods was also weighed down by a drop in auto purchases due to the cyberattack in June, while outlays for services were unchanged. The savings rate slowed to just 3.4%, well below the long-run average of about 8%.
The S&P Global US Manufacturing Purchasing Managers Index (PMI) edged back below 50 into contractionary territory to 49.5, while Services PMI rose to 56.0. The composite reading of 55.0 for July indicated that business activity improved at fastest pace since April 2022.
Meanwhile, existing home sales fell 5.4% month-over-month in June to 3.9 million units annualized, while new home sales edged lower by 0.6% to 617,000 units. Although 30-year fixed mortgage rates have dropped below 7%, affordability remains an issue for the housing market and inventories have ticked up recently.
In other news, WTI crude oil prices fell to about $77/barrel on hopes for a Gaza ceasefire agreement and global economic slowness weighing on demand, particularly from China. Durable goods orders unexpectedly plummeted 6.6% month-over-month in June on order cancellations for commercial aircraft, while US Treasury rates fell slightly over the week, with the 2-year dropping about 10 basis points to 4.39% and the 10-year yield falling to 4.20% as of this writing. The yield curve inversion between 2- and 10-year US Treasuries narrowed from 25 to about 19 basis points this week, reflecting a higher possibility for a soft landing as the market has priced in 2-3 quarter point rate cuts by the Fed in the second half of 2024, which is consistent with Chandler’s base case.
Next Week:
Case Shiller, JOLTS Job Openings, Consumer Confidence, MBA Mortgage Applications, ADP Employment Change, MNI Chicago PMI, FOMC Meeting, S&P Global US Manufacturing PMI, ISM Manufacturing, July US Employment Report
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