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Strong GDP Growth Underscores Strengthening Economy

August 1, 2018

 

Overview: Despite several major economic reports, a Federal Reserve meeting, and fresh news on tariffs over the past week, reactions in the market were small and offsetting. As a result, mortgage rates ended the week with little change.

On Friday, the first reading for second-quarter gross domestic product (GDP), the broadest measure of economic growth, showed a huge increase of 4.1%, which was very close to the consensus forecast. This was up from an upwardly revised 2.2% during the first quarter and was the highest level since the third quarter of 2014. Strength was seen in the key areas of both consumer spending and business investment. The question going forward for investors is whether the longer-term trend is closer to the first quarter’s or the second quarter’s pace of growth.

 

On Thursday, the Trump administration announced that the U.S. and the European Union (EU) will not escalate their trade dispute. Neither will impose additional tariffs while the two sides attempt to work out a new agreement. Investors reacted to the decreased chance of a trade war by shifting to riskier assets such as stocks from safer assets such as bonds, including mortgage-backed securities (MBS). The decline in demand for MBS caused mortgage rates to rise slightly.

 

As expected, the Fed made no policy changes at Wednesday’s meeting. The Fed’s statement was very similar to the one released after the June meeting, although it did upgrade the assessment of the economy. In particular, Fed officials noted that “economic activity has been rising at a strong rate,” which investors viewed as more positive than the prior description of “solid” growth. Investors expect the Fed to raise the federal funds rate at the next meeting on September 26. 
 
Week Ahead 

Looking ahead, the important monthly Employment Report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The Institute for Supply Management (ISM) Services Index will also come out on Friday. Finally, the Job Openings and Labor Turnover Survey (JOLTS), which helps the Fed round out its view of the strength of the labor market, will be released on August 8.

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