Morning Report - Q2 GDP disappoints, but Q1 revised positive

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.2	-8.3	-0.39%
Eurostoxx Index	3585.0	9.4	0.26%
Oil (WTI)	48.99	0.2	0.41%
LIBOR	0.297	0.003	0.92%
US Dollar Index (DXY)	97.47	0.494	0.51%
10 Year Govt Bond Yield	2.28%	0.00%
Current Coupon Ginnie Mae TBA	103.9	-0.2
Current Coupon Fannie Mae TBA	103.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.97

Markets are lower this morning after 2Q GDP disappoints. Bonds and MBS are flat

The advance estimate for second quarter GDP came in at 2.3%, missing the 2.5% street estimate. However, that may have been due to the fact that the first quarter number was revised upward from -0.2% to 0.6%. In essence, people were expecting a big bounceback from the weak first quarter, however some of that bounceback was pulled back into Q1. The consumption number was better than expected at 2.9%, and the core PCE (personal consumption expenditure - the Fed's preferred measure of inflation) was 1.8%, just below the Fed's target. Government spending was flattish as was private investment. This pretty much says that consumption is getting better with the labor market, however business investment is still depressed, which is probably more due to overseas concerns than domestic ones. The next big economic "tell" will be the back-to-school shopping season, which is right around the corner. 

The FOMC statement was a non-event yesterday. They noted continued improvement in the labor market, although they want to see further improvement before they raise rates. Given the GDP report (especially the inflation data), it is looking more probable that the Fed moves in September. 

Initial Jobless Claims rose to 267k after hitting a multi-decade low last week. The big question for the Fed is when wage growth begins to happen. That will be a function of whether some of the people who have exited the labor force want to (and are able to) return to the labor market. If not, then we should start seeing wage inflation sooner. FWIW, hearing anecdotally that the job market for recent college grads is strong this year. 

Michael Feroli, Chief US Economist at J.P. Morgan draws parallels between the current economy and that of 1966, with regards to inflation. The Fed got behind the curve and ended up chasing inflation throughout the 1970s. IMO, there are big differences between 1966 and today, most notably the lack of international competition back then. Europe and Asia really didn't rebound from WWII until the 1970s, so the US had no competitive forces pushing prices down. That simply isn't the case today. If anything, the strength in the U.S. dollar is keeping commodity and import prices low, which is keeping a lid on inflation. Wage growth will be key. No wage growth, no wage-price spiral.