Macro Commentary
We need a little more pep in our economic step! The first release of estimates for second quarter economic growth was made in both the US and Euro-area, both to the disappointing side. In the US, the quarter-over-quarter annualized rate of 1.2% fell short of the expectation at 1.8% despite an exceptionally strong increase in consumer spending (+4.2%). A decrease in inventories and fixed investment led the detractors. A weak economic report like this reduces the likelihood of a September Fed rate hike at the margin despite the language change in the decision this week which tilted towards strength.
Meanwhile, the economic release in the Euro-area showed that growth already stalled a bit in the second quarter even before the results of the UK referendum. Falling from an already meager 0.6% annualized rate in the first quarter, the 19-nation bloc registered an increase of only 0.3% in the second quarter. French growth was barely positive in Q2 after a pace of 0.7% in the first quarter. Germany too is expected to decelerate while Spain held its ground better (0.8% to 0.7%). The calls for more stimulus from European Central Bank (ECB) President Mario Draghi will grow, but he should take heed of the lesson from Japan. The Bank of Japan (BoJ) leader Kuroda announced a stimulus earlier in the week followed by details of a package that disappointed. Market reaction was modest with much of the ground lost after Brexit still putting a damper on Abenomics. Japanese central bank policy demonstrates that there can be a limit to monetary policy. We will see whether the table turns to fiscal policy of a similar size.