US Advance Q2 GDP estimates due today

The second quarter advance GDP estimates is due for release later this evening. Heading into the event, the market consensus is for the US GDP to have grown at a pace of 2.6% during the second quarter, up from a dismal -0.2% contraction posted in the first quarter.

The US Federal Reserve released its monthly monetary policy statement yesterday where it said that while the officials acknowledged the diminishing risk of the first quarter slowdown, the economy was however trending at a moderate pace but at the same time the recovery in the labour markets was robust. In terms of the language for the rate hike the FOMC statement noted that “some” improvements in the labour market would be reasonable for the Fed to hike rates. In other words, the US economic data for the months of July and August would prove to be important, especially in terms of the GDP, unemployment and inflation. There were no clear hints for a September rate hike but it is very likely that the markets will start reacting to any bullish print on the economic indicators.

Atlanta Fed’s GDPNow

The Atlanta Federal Reserve had earlier this year built its own GDP forecasting model, referred to as GDPNow, which tracks the US GDP growth in real time as and when important economic indicators are released. The GDPNow model got a lot of attention when it posted the closest estimate to actual release. In Q1, the GDPNow model forecasted the US GDP at 0.1%, as against general consensus of 1%. At the first release, the US economy was estimated to have grown at a pace of 0.2% (which was finally revised to -0.2%).

Interestingly, the GDPNow model currently forecasts the US GDP to have risen 2.4% during the second quarter, below the estimates of 2.6% based on the economists polled. Assuming a +/- 0.2% deviation from the GDPNow model, today’s advance GDP release will be critical for the markets.

The US Dollar Index initially weakened on the FOMC statement as investors first assumed that there was no change to the statement. However, given the fact that the Fed had introduced the word “some” in regards to the unemployment rate, the signal was clear that an improvement in the labour markets within the next two reports due in early August and September would be the key for the Fed to start hiking interest rates. Between now and September, the Federal Reserve will be able to gauge the labour market which will see two releases while in terms of inflation only one economic release for the CPI and PCE readings will be released, thus putting the onus on the labour market data ahead of the September rate hike.