It’s not fast and furious on the economic front. Data released this week showed the US economy growing at a 2.3% annualized rate in the second quarter. We did not expect a repeat of last year’s big bounce after a Q1 contraction and we did not get one. The level of activity was relatively broad with the biggest source of weakness, not surprisingly, in oil-related investment activity. The numbers indicated that the slowdown in activity trimmed about 0.4% off the headline growth number, causing a “miss” versus the consensus. Later in the week, the employment cost index (or ECI) was up only 0.2% quarter-over-quarter indicating that US wage growth is not accelerating. Expectations on future Fed action adjusted almost immediately. The market’s expectations on timing shifted more in favor of December (over September) with some spillover into 2016. We still expect Chairwoman Janet Yellen to call for the first increase in the Fed Funds rate in 2015, if only for credibility’s sake, but she will remain in the slow lane.
Meanwhile in Europe, Spain and Ireland posted good report cards. Spain’s flash estimate for Q2 came in at 3.1% year-over-year demonstrating consistent improvement since 2013 as labor market reforms took hold. While Ireland’s data is lagged (just reporting Q1 this week) it showed a solid 1.4% quarter-over-quarter expansion which implies over 5% growth in the year-over-year comparison. No doubt that a weakening euro and low energy prices are contributing to the region’s overall recovery. That said, we do not expect an eye-popping growth number from the Eurozone overall. Initial indicators suggest larger economies such as France are facing faltering consumption which may keep a lid on total output growth. The European Central Bank (ECB) has plenty of support for keeping their foot on the quantitative easing pedal. July’s headline inflation reading was only 0.2% and even the core inflation excluding energy and food was 1% (well below the stated goal of 2%) suggesting that there is a lot more room to run.
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