- The US economy grew by a bigger-than-expected 2.8% in Q2.
- The core PCE price index increased by 2.9%, easing from the 3.7%.
- US unemployment claims fell to 235,000 last week.
Interest futures rose on Thursday but closed well below session highs after a mixed US GDP report. Moreover, investors were gearing up for the core PCE price index report due on Friday for more clues on the outlook for Fed rate cuts.
US economic growth (Source: Bureau of Economic Analysis)
Data on Thursday revealed that the US economy remains resilient while inflation is easing. In the second quarter, the economy grew by a bigger-than-expected 2.8%. Meanwhile, economists had expected a 2.0% growth. At the same time, the core PCE price index increased by 2.9%, easing from the 3.7% increase in the first quarter.
The GDP report highlighted the robust US economy, dimming hopes for a 50-basis-point cut in September. However, the softer inflation figures kept bets for a 25-basis-point cut intact. With more incoming data, it is becoming more apparent that there is no urgency for the Fed to start lowering borrowing costs.
Separate data showed that US unemployment claims fell to 235,000 last week, missing forecasts of 238,000. The report showed that demand remains strong despite high interest rates. The strong labor market has powered the economy. As a result, consumption has remained high while the Fed battles inflation. If price pressures keep declining, the US central bank will cut rates and likely achieve a soft landing for the economy.
Data earlier in the week also showed that business activity increased in June. Notably, the services sector continued expanding. Meanwhile, a Reuters poll had shown that the Fed will cut rates in September and December. However, economists warned that policymakers might be cautious given the strong economy. Nevertheless, markets are convinced inflation is approaching the 2% target.
The next significant inflation gauge is the core PCE price index report, due later in the day. Forecasts show that inflation eased from 2.6% to 2.5%, bringing it closer to the Fed’s 2% target. However, the monthly figure might increase from 0.1% to 0.2%.
Softer-than-expected figures could increase bets for a 50-basis-point cut in September. At the same time, it could raise the chances of a cut at this month’s meeting. On the other hand, a spike would lower these bets and keep focus on a quarter-point cut in September.
