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    US Q2 GDP disappoints but Fed’s preferred inflation measure beats estimates

    The US economy expanded at an annualized rate of 2.3% in the second quarter of the quarter, below estimates that it would grow by 2.6%. Although the shortfall is not significant enough to deter the Fed from raising interest rates, it does highlight the continued modest pace at which the US economy has been expanding at since the end of the financial crisis.

    Revisions made to previous years’ growth show the US economy expanded at an average rate of 2.1% instead of 2.4% between the end of 2011 and end of 2014. However, first quarter growth for 2015 was revised up to 0.6% from -0.2%, mainly due to changes in how seasonal adjustments are calculated.

    Strong consumer demand was the main driver of growth as it grew by 2.9% in the second quarter. Consumers have benefited from lower gasoline prices and falling unemployment. The housing market made further improvements, while exports also performed strongly after a poor first quarter. Exports rose by 5.3% in the second quarter, outpacing the 3.5% rise in imports.

    Business fixed investment was still weak though as it dropped by 0.6% over the quarter. Inventories also dragged down growth after making a positive contribution in the first quarter. The energy sector was another weak spot as oil companies continued to make large spending cuts.

    While the growth figures might bring nothing new to the table, the personal consumption expenditure (PCE) price index could be taken as more revealing on the Fed’s intentions. The PCE index is the Fed’s preferred measure of inflation as it covers a wide range of household spending. In the second quarter, the core PCE price index, which excludes food and energy, rose to 1.8% from 1% in the first quarter, and above estimates of 1.6%. The Fed might see this as evidence that prices are now close enough to its 2% target to justify a rate increase.

    In a further boost to rate hike expectations, initial weekly jobless claims came in below estimates at 267k, versus forecast of 270k, as the jobs market continues to show signs of tightening.

    The dollar was volatile after the release of the data. It initially jumped on the data but later pulled back before advancing again. The euro dropped to a new one-week low of 1.0915 while the pound managed to stay above 1.56 to trade at 1.5618 in late European session. Against the yen, the dollar surged to a 2-month high of 124.57.

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