Another Twist! GDP Growth Surpasses Expectations, Is a Rate Cut Still on the Table?

On Thursday, July 25th, the U.S. Department of Commerce released data showing that the real GDP annualized quarter-over-quarter growth rate for Q2 was 2.8%, surpassing the expected 2% and significantly higher than the previous value of 1.4%.

The annualized quarter-over-quarter core PCE price index for Q2 came in at 2.9%, exceeding the expected 2.7%, but lower than the previous value of 3.7%.

Following the data release, the 10-year Treasury yield briefly spiked before slightly retreating, with the latest yield still hovering around 4.2%.

Drivers of GDP Growth

Breaking it down, the primary contributors to the Q2 GDP growth were consumer spending, private inventory investment, and non-residential fixed investment.

Private inventory investment typically refers to the stock of assets held by businesses to meet production and sales needs, including raw materials, work-in-progress, and finished goods.
Non-residential fixed investment usually refers to investments in fixed assets for non-residential purposes, such as commercial real estate, office buildings, factories, etc.
Among these, personal consumption had the most significant impact on GDP, growing by 1.57%, a notable increase from the previous quarter's 0.98%.
The contribution of private inventory growth also saw a substantial rise, from -0.42% in Q1 to 0.82%. Government contribution to GDP similarly increased from 0.31% to 0.53%.

Current economic data suggest that the U.S. is on track to achieve a "soft landing"—steady economic growth while inflation gradually cools. This expectation positively influenCES market confidence.

Is a Rate Cut Still Likely?

Despite the better-than-expected economic growth, the expectation of a rate cut has not reversed. According to CME Group data, a rate cut in September is almost certain, with a probability of 100%. The likelihood of at least three rate cuts this year has also reached nearly 60%.

Notably, the Federal Reserve's policy meeting on July 30th will significantly impact the market, and as of the latest data, there is a 6.7% chance that the Fed will announce a rate cut at the July meeting.

Interestingly, former New York Fed President William Dudley recently changed his previously hawkish stance, suggesting that the Fed could cut rates at the July meeting.

His successor at Goldman Sachs, Jan Hatzius, also questioned in a previous report, "Why wait until September?" Such public statements from prominent figures seem to be creating a sense of urgency for the Fed to cut rates.

In addition to the upcoming policy meeting, the Jackson Hole Symposium in late August is also worth watching.

Fed Chair Jerome Powell is likely to signal a shift in risk management at the symposium, similar to last year, possibly providing a framework for assessing unemployment and inflation dynamics and considering the impact of monetary policy on the real economy. This could serve as a "theoretical support" for a rate cut in September and offer a benchmark for mid-term policy implementation over the next year, possibly through scenario analysis or data thresholds.

Since the Federal Reserve announced a 25 basis point increase in the benchmark interest rate on March 17, 2022, the ongoing rate hike cycle has lasted over two years and is nearing its end. We will continue to monitor future developments closely.