US GDP Lifts Dollar and Stocks

The US dollar is extending its gains in response to the strong US GDP figures.  There are four elements of the report to note.  First, the economy expanded by 4.0% in Q2, well above consensus expectations.  Second, Q1 was revised to show a 2.1% contraction rather than 2.9%.  Third, personal consumption improved to 2.5% from a revised 1.2% pace in Q1 (originally 1.0%).  Fourth, and arguably even more significant that the growth itself is the core PCE deflator.  It rose to 2.0% from 1.2%.  

On a year-over-year basis, the US economy expanded by 2.4%, which is close to what economists view as trend growth.  Recall that the part of the shock from Q1 was a drop in service consumption.    Today's report has service consumption adding 0.31 percentage points to GDP.  Inventories added 1.66% and trade subtracted 0.61%.  Business investment contributed 0.9 percentage points to growth.  It increased by 5.9% at an annualized rate.   Growth was also flattered by the biggest gain in state and local government spending in five years. 

The data lends more credence to arguments that the Federal Reserve is nearing its mandates and this may bring forward speculation of when the Fed delivers its first rate hike.  The GDP data follows on the heels of the ADP job estimate of 218k, close to the consensus of 230k.   Today's GDP report also contained benchmark revisions.  It now appears the US economy grew more slowly than previously known over the past three years.  

The euro slumped to $1.3370, just taking out the technical retracement objective near $1.3375.  The next technical objective is near $1.3325.  Sterling, which was trading at six week lows prior to the data, eased to $1.69.  A break of it suggests, $1.6870 next.  The dollar was at one month highs against the yen just above JPY102.50.   The dollar-bloc currencies weakened further as well.  US 10-year bond yields resurfaced above 2.50%, but only barely. 

We have been monitoring a gap in the S&P 500 daily bar charts created by last Friday's sharply lower opening.  US stocks are likely to open broadly higher today to retrace part of yesterday's losses.  The gap is found between yesterday's high 1984.85 and last Thursday low of 1985.79. 

The data today likely heightens the risk that there is a hawkish dissent, and Dallas Fed President Fisher is the most likely candidate.