VTI - Slower Q2 Growth Fuels Fed's Inflation Fight: A Turning Point For The U.S. Economy?

2023-08-31 13:18:50 ET

Summary

• Revised Q2 GDP growth rate of 2.1% may help the Federal Reserve curb inflation.
• Stronger consumer spending and government expenditure contribute to the revised estimate.
• Forecasts for Q3 GDP growth at 5.9%, but factors like student loan payments could slow growth.

Fundamentals

The growth rate of the U.S. economy in the second quarter was revised to a slightly slower pace, which may benefit the Federal Reserve's efforts to curb inflation. The Commerce Department's latest figures reveal that the Gross Domestic Product ((GDP)) increased at an annualized rate of 2.1%, compared to the initial estimate of 2.4%.

This updated estimate incorporated stronger consumer spending, government expenditure, and exports, while business investment and inventory levels were adjusted downward. Specifically, nonresidential fixed investment, which is indicative of business spending, was adjusted to a 6.1% growth rate, compared to 7.7% in the initial report. Residential fixed investment, reflecting the housing market, had less of a negative impact on economic growth than initially thought.

Consumer spending, accounting for roughly 70% of the economy, was also revised upward slightly. This suggests that the pace of economic activity is aligning more closely with the country's productive capabilities, potentially easing inflationary pressures, according to Bill Adams, Chief Economist at Comerica Bank.

Federal Reserve officials are keenly monitoring these GDP figures. While the economy displayed robust performance over the summer, boosted by strong retail and entertainment spending, the Fed raised interest rates by a quarter point in July, marking the highest level in 22 years. Federal Reserve Chair Jerome Powell indicated that additional rate hikes might be in store if economic growth remains strong.

Forecasts for Q3 GDP growth currently stand at an annualized rate of 5.9%, according to the Atlanta Fed, though these projections may be revised downward as more data comes in. Several factors could contribute to slower economic growth, such as the recommencement of student loan payments and the delayed effects of the rate hikes.

As the Federal Reserve continues its most aggressive rate-tightening policy in decades, the U.S. consumer still drives economic growth, suggesting the possibility of a "soft landing," where inflation could be tamed without a significant rise in unemployment.

Lydia Boussour, senior economist at EY-Parthenon, notes that high-frequency data suggests a stable economic outlook, reducing the likelihood of a near-term recession. She anticipates a 2.5% annualized GDP growth rate for Q3, underscoring an improving economic landscape conducive to a soft landing scenario.

Let's take a look at the Nasdaq weekly standard deviation report published in the Marketplace section under Mean Reversion Trading.

Nasdaq: Weekly Standard Deviation Report

Aug. 26, 2023 6:24 PM ET

Summary

• The futures contract has shown bearish trends in both trend and price momentum over the past week.
• Closing below the 9-day SMA and VC Weekly Price Momentum Indicator confirms the bearish trend.
• Traders are advised to cover short positions on corrections within the range of 14661 to 14343 and consider profit-taking between 15358 and 15737 for long positions.

Executive Summary: Over the past week, the futures contract has demonstrated bearish trends in both trend and price momentum. This report will provide an in-depth analysis of the market's movement and suggest actionable insights based on the week's indicators.

Weekly Trend Momentum: The futures contract concluded this week at a price of 14980. Importantly, this closing is below the 9-day SMA, which stands at 15308. This underlines a bearish trend momentum for the week. However, a close above this 9-day SMA would indicate a shift, changing the prevailing bearish short-term trend to neutral.

Weekly Price Momentum: Consistent with the trend momentum, the market's closing below the VC Weekly Price Momentum Indicator pegged at 15039, confirms the bearish price momentum. Any close above the VC Weekly in the forthcoming sessions would overturn the bearish indication to a neutral stance.

Weekly Price Indicator Recommendations:

• Traders holding short positions are advised to cover these positions on corrections that fall within the range of 14661 to 14343. Those looking to go long should wait for a weekly reversal stop as an entry signal.
• For traders already in a long position, the 14343 level should be set as a Stop Close Only with a Good Till Cancelled ((GTC)) instruction.
• Those considering taking profits from long positions should eye the range of 15358 to 15737 within the week as their target.

Cycle & Strategy: The forthcoming cycle due date is set for 8.30.23.

Strategically:

• For traders with short positions: The advised range for profit-taking lies between, 14661 and 14343.
• For those holding long positions: The recommended range to consider profit-taking is between 15358 and 15737.

Concluding Remarks: Given the week's predominantly bearish momentum, traders are encouraged to remain vigilant and strategically poised. Utilizing the above indicators and suggestions can aid in optimizing market decisions.

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