Front-loaded economic growth
The headline Q2 GDP data showed a 3.0% seasonally-adjusted annual growth rate, up from -0.5% in Q1. On the face of it, that is strong. However, the data has been subject to big swings in trade flows, related to tariffs. Domestic demand growth is slowing.
After the announcement of tariffs on 1 August, the Yale Budget Lab estimates the effective import tariff at 18.3%, the highest since 1934
. There have been numerous references to the impact on corporate earnings during the current Q2 reporting season. Inflation indicators have all ticked higher since April. Tariffs are a tax on US companies and consumers and meanwhile, jobs in manufacturing continue to decline.
I sense expectations have changed on the US economy’s near-term outlook. Recession risks have increased. The market is now pricing an 81% chance of a rate cut in September and over two cuts before the end of the year. However, given the inflation backdrop the Fed is in a tough spot. More evidence of labour market weakness is required for a move, but I guess that is what markets will possibly bet on now. The implications are curve steepening in US rates. For equities, however, the solid Q2 earnings numbers are hard to bet against. That leaves credit spreads still tight until the recession alarm bells ring a little louder.