US Dollar, Oil Prices, Tech Stocks Rise As GDP Roars By 3% In Q2; Bonds, Yen Slip As Bets For Large Rate Cuts Ease

Author: Piero Cingari | August 29, 2024 10:21am

The U.S. dollar, oil prices and tech stocks surged Thursday following an upward revision of the second-quarter real gross domestic product growth to 3%, signaling the continued strength of the U.S. economy.

More defensive assets like bonds and the Japanese yen fell as expectations for interest rate cuts were slightly tempered.

What Happened: The U.S. economy continues to display robust health, boasting a notable real GDP growth rate of 3% in the second quarter, revised higher from the initial estimate of 2.8% on Thursday. This represents more than double the 1.4% growth recorded in the first quarter, marking the eighth consecutive quarter of sequential growth for the U.S. economy.

The boost was primarily driven by consumer spending, which surged by 2.9% in the second quarter, an upward revision from the previously reported 2.3% and significantly higher than the 1.5% growth in the first quarter. Corporate profits also showed improvement, flipping from a 2.7% contraction in the first quarter to a 1.7% expansion in the second.

Positive signs also emerged from price pressures, as Personal Consumption Expenditure prices were revised downward in the second estimate.

The revised data also included downward adjustments to nonresidential fixed investment (4.6% vs. 5.2% earlier reported), exports (1.6% vs. 2%), private inventory investment (7.5% vs. 8.4%), government spending at both federal (3.3% vs. 3.9%) and local (2.3% vs. 2.6%) levels, and residential fixed investment (negative 2% vs. negative 1.4%). Imports were adjusted slightly higher (7% vs. 6.9%).

Why It Matters: The resilience of the U.S. economy reduces recession risks that had surfaced earlier this month following a cooler-than-expected July jobs report.

For markets sensitive to domestic economic conditions, such as small- and medium-cap stocks, a healthy economy signals improved risk sentiment among investors.

The concurrent decline in price pressures bolsters the Federal Reserve’s confidence that inflation is trending toward its 2% target, paving the way for a September interest rate cut.

The strong economic activity also represents a factor that could refrain the Fed from making large or swift rate cuts to avoid reigniting inflationary pressures.

Market-implied odds for a 50-basis-point rate cut in September slightly eased from 38% a day ago to the 32.5%, as per CME Group‘s FedWatch data.

Market Reactions:

• U.S. Dollar: The U.S. Dollar Index, tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), rallied 0.4% in response to the GDP data, building on a 0.5% gain from Wednesday.
• Bonds: Treasury yields edged higher, causing the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) to decline by 0.5%.
• Japanese yen: The USD-JPY pair rose 0.7% on Thursday to 145.35 levels. The Invesco CurrencyShares Japanese Yen Trust (NYSE:FXY) fell 0.7%.
• Stocks: The S&P 500 as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) was up by 0.3%. The tech-heavy Nasdaq 100, tracked by the Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), climbed 0.8%, despite a 2.2% drop in Nvidia Corp. (NASDAQ:NVDA).
• Sector Performance: The Technology Select Sector SPDR Fund (NYSE:XLK) led sector gains, up 0.9%.
• Oil: The United States Oil Fund (NYSE:USO) rose by 2.2%, fully reversing Wednesday’s losses.
• Gold: The SPDR Gold Trust (NYSE:GLD) rose 0.4% to $2,515 per ounce.

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Illustration created using artificial intelligence via MidJourney.

Posted In: FXY GLD IWM NVDA QQQ SPY TLT USO UUP XLK XLY