US: GDP, Labor Market Report give different indications

• US: GDP, Labor Market Report give different indications
• US: FOMC meeting: Slightly better assessment of economic indicators 

The release of the preliminary estimate of Q2 GDP data on Wednesday fueled interest rate expectations. Growth was reported at annualized 4% significantly above the market’s estimate. Though, due to the decline in economic output in the first quarter (-2.1% annual.) economic growth in the first half of the year was in total weak. But markets gave more weight to the most recent dynamics, i.e. the second quarter, which showed a recovery in all major segments. 

The same day the Fed’s FOMC decided to keep its monetary policy unchanged. However, the economic assessment was slightly improved. Monthly asset purchases were reduced by USD 10bn to USD 25bn, continuing the pace of reductions that started in December of last year. The outlook for further reductions of asset purchases in measured steps was left unchanged, confirming market expectations for an end of QE in October. Concerning short-term interest rates, the committee reiterated that, after the end of asset purchases, the target range for the federal funds rate should remain at the current level for a considerable time. 

Though, the GDP data seemed to have had more impact on market participants. Increased uncertainty about the future path of interest rates triggered a sell-off on equity markets on Thursday and Friday. 

Finally, on the last day of the week labor market data for July came in somewhat below expectations, calming fears of early interest rate hikes by the Fed. The unemployment rate increased from 6.1% to 6.2%. Non-farm payrolls in the amount of 209,000 were added, more than 20,000 below expectations. At the same time the June numbers were revised upwards by 10,000. In total we view the labor market numbers as neutral for the monetary policy outlook, neither fueling nor dampening interest rate expectations. 

To sum it up, the week brought differing signals concerning the future development of interest rates. For the time being the dovish Fed together with average labor market data should prevail. Though, going forward we think that better economic data could fuel interest rate expectations again during the coming weeks.