US rebounds, edging Fed towards a rate rise in September

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Lisa Hornby, Fixed Income portfolio manager

“The Federal Open Market Committee’s (FOMC)  updated policy statement on Wednesday was relatively unchanged from the June release, with no clear new signal indicating the date of the impending rate rise. The Fed did acknowledge the continued improvement in the labour market, citing the fact that the “underutilisation of labour resources have diminished since early this year”.

Q2 US GDP data supports the Fed’s more upbeat tone on economic conditions. The rise in real GDP, at a 2.3% annual rate in Q2, was marginally below the 2.5% consensus. Real final sales rose at a rate of 2.4%, and consumption growth accelerated, from 1.8% in Q1 to 2.9% in Q2. The two measures reflect an improved consumer backdrop, both from lower gasoline prices and from improvements in the labour market.

The Q1 GDP print was also revised up to +0.6% from -0.2% as the Bureau of Economic Analysis performed its annual revisions to growth figures. These annual revisions resulted in a slower pace of growth for 2013, now 1.5% versus 2.2% previously. The growth rate for 2014 was unchanged at 2.4%.

The GDP-based price index (PCE) rose at a 2% pace in the second quarter, while core PCE – which excludes the more volatile elements of food and energy – rose at a 1.8% pace.

Shorter-dated Treasuries underperformed significantly on today’s data release, as market expectations of a September rate hike increased.

The ECI and payroll data will both be released within the next seven business days and should provide the market with a good indication as to whether or not the Fed will indeed hike in September.”

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