Colossal US Q2 GDP growth. But is it sustainable?
By Vincent-Frédéric Mivelaz
US second-quarter GDP growth increased at 4.10% (expected: 4.20%) annualized q/q from 2% previously — its fastest pace in four years. The strong US growth numbers in Q2 are mainly explained by President Trump's USD 1.5 trillion tax cut, including lower tax rates for corporations of (down from 35% to 21%) and for American households (along with tax benefits). The cuts, which are expected to expire by the end of 2025, have strongly boosted private consumption and investment across the country due to higher spending. Another significant factor is Chinese imports of US agricultural products.
Contrary to Trump's view, however, sustained GDP growth of 4% appears improbable. Production capacity is above long-term average, the labor market is tight and interest rate hikes are approaching, not to mention the uncertainties surrounding trade wars. We would rather support the Fed's expectations of Q4 GDP y/y growth at 2.80 and inflation (ex. energy and food) along 2%.
Even though the White House fiscal stimulus policy is less than a year old, the Trump administration is already discussing a new tax plan for October, which would further reduce corporate tax to 20%, while the rest of the policy would focus on the middle class.
Today, we have the June Home Sales and the July Dallas Fed Manufacturing Business Activity Index.
US and Asian stocks lower – EU to follow
By Vincent-Frédéric Mivelaz
Despite impressive growth numbers from the US economy, American and Asian stocks market have been in risk-off mode recently as central bank decisions are approaching. The dollar index is falling while US treasuries are declining following a rise on Friday.
The US stock market closed lower on Friday due to a global sell-off of technology shares. The NASDAQ fell by -1.46%, the S&P 500 closed at -0.66% while the Dow declined by -0.30%. The same is true for Asian stocks, as the Bank of Japan is holding its meeting tomorrow. The Nikkei 225 closed on Monday at -0.74% and the Hong Kong Hang Seng closed slightly lower at -0.25%, whereas the Korean Kospi closed flat (-0.06%).
European stocks are expected to trade along the same range, with confidence indicators expected to edge downwards. German July CPI figures are likely to remain flat y/y and higher m/m (expected: 0.40% vs prior: 0.10%).
The EUR/USD is currently bouncing off from a 1.1643 low (26/07/2018 low), trading above 16.70 and heading along 1.1680. The pair could turn down at 1.1650 in late afternoon trading.