US and Asian stocks lower – EU to follow
US and Asian stocks market were in risk-off mode recently as central bank decisions are approaching and despite impressive growth numbers from the US economy. The dollar index is falling while US treasuries are declining following recent rise on Friday.
The US stock market closed lower on Friday due to a global sell-off in technology shares. The NASDAQ fell by -1.46%, S&P 500 closed at -0.66% while the Dow declined by -0.30%. The same is true for Asian stocks, as the Bank of Japan is holding its meeting tomorrow. The Nikkei 225 closed on Monday at -0.74% and the Hong Kong Hang Seng closed slightly lower at -0.25% whereas Korean Kospi closed flat (-0.06%).
European stocks are expected to trade along the same range, with confidence indicators expected to print downward while German July CPI figures to remain flat y/y and higher m/m (expected: 0.40% vs prior: 0.10%).
The EUR/USD is currently bouncing off from 1.1643 low (26/07/2018 low), trading above 16.70 and heading along 1.1680. The pair could be turning down at 1.1650 in late afternoon.
Colossal US Q2 GDP growth – is it sustainable ?
US second quarter GDP growth estimates at 4.10% (expected: 4.20%) annualized q/q from 2% previously, its fastest pace in four years. The strong US growth numbers in Q2 are mainly explained by Trump’s USD 1.5 trillion tax cut, including lower tax rates for corporations of 21% (down from 35%) and for American households (along with tax benefits). The legislation is expected to expire by the end of 2025. Accordingly, the measure strongly boosted private consumption and investment across the country due to higher spending. Another significant factor is the impact of Chinese imports from the US in agricultural and meet products.
However, contrarily to Trump’s view, a sustained GDP growth of 4% by the end of the year appears improbable. Production capacity is above long-term average, labor market is tight and interest rate hikes are approaching, without talking about dragging uncertainties around trade war. We would rather support Fed’s expectations of Q4 GDP y/y growth at 2.80 and inflation (ex. Energy and Food) along 2%.
In addition to less than a year old fiscal stimulus policy, the Trump administration is already discussing a new tax plan for October 2018, which would reduce corporate tax by 20% while the rest of the policy would focus on the middle class.
Today we have June Home Sales and July Dallas Fed Manufacturing Business Activity Index.
