The US Q2 economic growth rate and PCE both exceeded expectations, pouring cold water on the Fed's rate cut expectations

According to the Zhitong Finance and Economics APP, the growth rate of the US economy in the second quarter exceeded expectations, indicating that demand remains stable under the pressure of high interest rates. Preliminary data shows that the US GDP grew by 2.8% year-on-year in the second quarter, surpassing the market's expectation of 2.0% and the previous quarter's 1.4%. The main growth engine of the US economy, consumer spending, increased by 2.3%, also higher than expected.

The core PCE price index, a key inflation indicator closely watched by the Federal Reserve, rose by 2.9% in the second quarter, slowing down from 3.7% in the first quarter but still higher than the expected 2.7%.

Under the heavy pressure of high interest rates, consumer spending and broader economic activities have cooled down, which helps gradually curb inflation.

This is a positive sign for the Federal Reserve. The Fed is working to achieve a soft landing for the economy and may start cutting interest rates as early as September. However, striking the right balance to cool the labor market without causing millions of people to lose their jobs will be a challenging task, especially with the unemployment rate rising for three consecutive months.

After the report was released, US Treasury yields rose slightly. The market expects that the Fed will not cut interest rates next week.

Ryan Sweet, an analyst at Oxford Economics, wrote that the economic re-acceleration "should help alleviate concerns about whether the economy can continue to expand and quell rumors of a rate cut by the Fed in July." Traders continue to expect the Fed to cut rates by 25 basis points in September, November, and December, while reducing their bets on further rate cuts by the Fed. Previously, traders believed that there was about a 21% chance that the Fed would cut rates by more than 25 basis points before the September meeting, but now it has dropped to around 15%.

Driving Factors of the US Economy

According to the GDP report, US consumer spending was mainly driven by a rebound in durable goods such as cars and furniture, as well as moderate growth in service sector spending compared to the first quarter.

Boosted by defense spending, government expenditure contributed more to GDP than in the first quarter of this year. Residential investment dragged down economic growth for the first time in a year, as high mortgage rates suppressed sales activities and new construction.

Business investment grew at the fastest pace in nearly a year, with equipment investment showing the strongest growth, reaching the fastest pace since early 2022. Another report on Thursday showed that commercial equipment orders in US factories (excluding aircraft and defense equipment) in June saw the largest increase since early last year. This indicates that such spending will continue to drive economic growth in the coming months