Despite the bleak recessionary predictions earlier this year, the U.S. economy seems to be on a robust rebound. As we delve into the latter half of 2023, indicators reveal a potential acceleration in U.S. economic growth. This unexpected upturn has sent ripples across bond and stock markets globally, prompting a swift repricing of long-term inflation and interest rate assumptions.
Rising U.S. Economic Indicators
Recent data supports this optimistic outlook. A stellar July retail sales report set the stage, which was closely followed by encouraging figures on U.S. industrial output and housing starts for the same period. These developments have economists and market watchers recalibrating their expectations for the U.S.’s third-quarter gross domestic product (GDP).
Although it has its fluctuations, the Atlanta Federal Reserve’s real-time ‘GDPNowcast’ is a critical tool for gauging current GDP growth. In a startling revelation, this estimate jumped to an impressive 5.8%, its highest since January 2022. To put this into context, this growth rate is over double the prediction made just a month ago. This surge is in sharp contrast to the official second-quarter GDP growth, which was estimated at an annualized rate of 2.4%. Even this figure came as a pleasant surprise to many.
Reflecting this bullish sentiment, major banking and financial institutions have begun revising their forecasts. A notable example is Deutsche Bank. Just this Wednesday, they revised their third-quarter real GDP estimate to 3.1%, more than doubling their initial predictions.
The Global Picture: China’s Woes
China, the world’s second-largest economy, presents a contrasting narrative. Traditionally a global economic powerhouse, it currently faces numerous challenges. With its property sector under duress, concerns about credit, and geopolitical tensions escalating, China’s GDP predictions are taking a downward turn. This shift means that, for the first time in recent memory, U.S. growth might surpass China’s in the coming quarter.
Repercussions of U.S. Economic Resilience
This newfound resilience in the U.S. economy isn’t without consequences. Especially significant is the response to the U.S. Federal Reserve’s (Fed) interest rate hikes – over five percentage points in the last 18 months. This aggressive monetary policy stance has led many to reevaluate their predictions of sustainable interest rates in the foreseeable future, causing an uptick in long-term projections.
However, the Fed, according to the minutes from its latest policy meeting, is still weighing its options. The decision to implement another rate hike hangs in the balance. The upcoming annual Jackson Hole conference will be a pivotal event, providing a platform to fine-tune any policy guidelines before the Fed reconvenes in September.
Current Market Dynamics
Presently, the market’s reaction has been characterized by a significant repricing of bonds. Most notably, 10-year Treasury yields have risen, reaching 4.3% on Thursday – a level not seen since the previous October.
This bond market volatility has had a domino effect on stocks. While the repercussions of escalating growth are multifaceted, influencing earnings and interest considerations, there’s palpable anxiety. Evidence of this sentiment was clear on Wall St, which witnessed significant losses in its major indices. However, futures made a minor comeback in the subsequent trading session. Fluctuating oil prices, influenced in part by China’s economic challenges, may further impact energy demand projections.
Internationally, the narrative is mixed. Chinese stocks have shown signs of stabilization after enduring a series of setbacks. However, stock exchanges across Asia and Europe haven’t been so fortunate, experiencing reds yet again.
Currency Movements: The Dollar Reigns Supreme
In the currency arena, the U.S. dollar is the standout performer, particularly against the Chinese yuan. Despite efforts by Chinese state banks to shore up the renminbi, the dollar has reached its peak for the year. Further emphasizing its strength, the dollar’s DXY index, which measures its value against other major developed market currencies, has achieved its highest level in the past two months.
Key Events to Monitor
As we navigate the economic landscape, several critical events and announcements are on the horizon:
- U.S. Corporate Earnings Announcements: Companies to watch include Walmart, Applied Materials, Tapestry, Ross Stores, and Keysight Technology.
- Economic Data Releases: Look out for U.S. weekly jobless claims, the August Philadelphia Fed business survey, and the July leading indicator.
- Treasury Activities: The U.S. Treasury is set to auction 4-week bills.
As 2023 progresses, the economic resurgence of the U.S. stands in stark contrast to the challenges faced by other global economic leaders, especially China. These dynamics will undoubtedly influence investment decisions, policy choices, and market responses. All eyes are now on the coming months, with market participants eagerly awaiting the next wave of economic data and policy decisions.