US Q2 GDP: Driven By Consumption, Inventories.

CALENDAR

EUR/USD

• Economic growth accelerated more than expected in the second quarter and the decline in GDP in the previous quarter was less steep than previously estimated. GDP growth amounted in the second quarter to 4.0% annual rate after shrinking at a revised 2.1% pace in the first quarter. Median market forecast assumed growth by 3.0%. The growth in the first quarter was revised up to -2.1% from -2.9% previously estimated.
• As you can see on the chart growth in the second quarter was driven mainly by consumer spending and a swing in business inventories. Consumer spending growth accelerated at a 2.5% pace. The saving rate increased to 5.3% from 4.9% a quarter earlier. Real personal consumption expenditures contributed 1.69 pps, up from just 0.83 pp. in the first quarter, with durables providing 0.99, nondurables adding 0.39, and services 0.31.
• Inventories contributed 1.66 pps. to GDP growth after a negative contribution in the scale of 1.16 pps in the first quarter. Contribution from net exports remained negative, in line with our forecast. Exports added 1.23, while imports subtracted 1.85. Negative contribution from net exports is typical for the phase of economic recovery.

• Labor market data were also released today. In line with ADP estimates US companies hired 218k workers in July, but the figure fell short of forecasts and the previous month's level. Jobs in professional and business services increased by 61k, down from 79k in June. Goods-producing firms added 16k jobs compared with 43k in June.
• The GDP data could raise debate on whether the central bank may need to raise interest rates a bit sooner than had been anticipated. The Fed will almost surely announce that it's reducing its monthly bond purchases from USD 35 bn to USD 25 bon. We maintain our forecast that the Fed will raise the rate in April 2015.
• The EUR/USD hit a fresh eight-month low today. We expect weaker nonfarm payrolls data on Friday than market consensus and that is why we suggest closing short position on EUR/USD.

Short-term outlook: mixed
Medium-term outlook: mixed with bearish bias
Long-term outlook: mixed with bearish bias

USD/JPY

• Japan's industrial output fell 3.3% mom (vs. median forecast of a 1.2% decline) in June as companies curbed production due to an increase in inventories, government data showed on Wednesday. It was the fastest fall in output since the earthquake and tsunami of March 2011.
• The data and the comments from the Ministry of Economy, Trade and Industry suggest the economy may struggle to rebound in the current quarter following an expected contraction in the second quarter from the sales tax hike.
• Manufacturers surveyed by the ministry expect output to rise 2.5% in July and increase 1.1% in August. The Ministry of Economy, Trade and Industry suggested, however, these forecasts were overly optimistic because the high level of inventories, especially of durable consumer goods, meant manufacturers needed to curb output further.
• Other bad news from Japanese economy is that exports fell 2.0% yoy in June (despite strong depreciation of JPY yoy), while imports increased 8.4% yoy. The weak JPY is not helping to increase exports because Japanese companies have been shifting sales to emerging markets.
• After today’s data we maintain our GDP forecast in the Q2 at the level of -1.2% but we lower our forecast for Q3 from 0.5% to 0.4%.
• The USD/JPY broke up above 102.00 and then 102.50 after US GDP data. The next barriers are 102.80 (June high) and 103.00.

Short-term outlook: mixed
Medium-term outlook: mixed
Long-term outlook: mixed with bullish bias