America’s Verdict – Acceleration of the US economy turns markets upside down

Mike Dolan’s A Day Ahead Look at US and Global Markets A far cry from recessionary forecasts from earlier this year, US economic growth may accelerate in the second half of 2023 – as bond and stock markets panic to adjust to longer-term inflation and interest rate assumptions.

After a stellar report on July retail sales on Tuesday, estimates for U.S. third-quarter gross domestic product are inching closer, following yesterday’s surprise news on U.S. industrial production and housing starts last month.

Although this is a largely volatile model, the Atlanta Federal Reserve’s real-time ‘GDPNowcast’ for GDP growth in the current quarter has risen to 5.8% – the highest estimate since January 2022 and more than double from a month ago.

By comparison, official second-quarter GDP growth estimates were 2.4% year-on-year — a significant upside surprise — and Wall Street forecasters are revising their forecasts. Deutsche Bank, for example, on Wednesday doubled its forecast for third-quarter real GDP to 3.1%.

As the Chinese economy struggles under the weight of the real estate sector, debt and geopolitical concerns — and GDP forecasts are quickly being revised downwards — U.S. growth will be higher this quarter.

The implications of such a slowdown in US activity for a rate hike of more than five percentage points in 18 months has forced many to reconsider the horizon of fixed interest rates and raise long-term forecasts.

The central bank itself, judging by the minutes of its most recent policy meeting released on Wednesday, is still unsure whether it will raise rates again. The annual Jackson Hole conference will be held later this month, which will fine-tune any guidance before the Fed meets again in September.

For now, the constellation continues to see bond revaluations and 10-year Treasury yields rose above 4.3% on Thursday for the first time since October.

And the bond market’s reluctance has added further concern to equities — though the earnings and interest rate implications of accelerating growth are competing implications.

After another sharp loss in Wall Street indices on Wednesday, futures gained some ground into today’s bell. A drop in oil prices could help as China’s troubles interfere with energy demand forecasts.

Abroad, Chinese stock markets settled cautiously after a few days of wear and tear, but other stock markets in Asia and Europe were back in the red.

The dollar has been the big winner throughout this stretch — it rose to its highest level of the year against the Chinese yuan, despite reports that state-owned Chinese banks are trying to prop up the renminbi.

The dollar’s DXY index rose to its highest level in two months against developed market currencies. Events to Watch Thursday: * US Corporate Earnings: Walmart, Applied Materials, Tapestry, Ross Stores, Keyside Technology * US Weekly Jobless Claims, August Philadelphia Fed Business Survey, July Leading Indicator * 4-Week Bills Auction at US Treasury