Anticipating a soft landing
Summary
The economy appears on track for a soft landing, with cooling inflation, robust GDP growth, and strong but decelerating consumer spending. As a result, a rate cut at the September Federal Open Market Committee (FOMC) meeting looks increasingly likely. However, given the inherent uncertainty in the economy, companies should continue to consider hedging against potential volatility.
GDP
The U.S. economy gained momentum in the second quarter, with real GDP growing by an annualized rate of 2.80%. The release beat expectations of 2.10% and was double the rate observed in the first quarter, when the economy expanded by just 1.40%. This growth was mainly driven by stronger consumer spending, which rose by 2.30%. In last week’s market update, I noted that the hotter-than-expected retail sales figures had alleviated concerns of a steep economic decline. The recent GDP data reinforces this trend, suggesting that a soft landing for the economy certainly appears within reach. However, the overall outlook remains cautiously optimistic.
Despite strong consumer spending, companies reported drops in sales and suspected that consumers were beginning to feel the squeeze of continued high inflation and borrowing costs, indicating that spending is slowing down. Despite the stronger-than-expected GDP figures, it is unlikely that these numbers will influence or deter a September rate cut. Instead, they highlight the ongoing resilience of the economy. The probable rate reduction could offer timely support, but companies should continue to monitor economic conditions closely to navigate ongoing uncertainty.
Source: U.S. Bureau of Economic Analysis
Consumption
Headline PCE for June rose +2.50% year-over-year, in line with expectations, followed by May’s +2.60% year-over-year release. Core PCE for June rose +2.60% year-over-year, slightly greater than expectations by 0.10%, unchanged from May’s year-over-year reading. Despite the slightly higher numbers, the readings marked the slowest annual increase for core PCE in over three years. Considering the Fed’s preference for core PCE as an inflation measure, this release significantly reinforces the case for a September interest rate cut.
Last Thursday’s durable goods report showed a surprising -6.60% month-over-month decline, far below the initial forecast of +0.30%, marking the lowest reading since 2020. This drop was primarily driven by a decrease in aircraft orders, suggesting the reported decline in industrial activity might be overstated. Meanwhile, personal spending increased by 0.30% month-over-month, down from May’s reading of 0.40%. Overall, while spending remains strong, it appears to be slowing down.
The week ahead
This week’s economic releases will highlight the FOMC interest rate decision coming out on July 31. Additionally, the U.S. employment report is scheduled to be released August 2.
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About the author
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Amol Dhargalkar
Managing Partner, Chairman
Kennett Square
Amol Dhargalkar is a Managing Partner and Chairman for Chatham’s Board of Directors. He brings over 20 years of experience in derivatives capital markets expertise.
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
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