Caution May Prevail At This Week's FOMC Meeting -- Although US Economic Growth May Be Speeding Up

This Wednesday's FOMC Statement is unlikely to provide any definitive hint on whether a rate hike is coming in September.  The US economy appears to be speeding up somewhat, but there remains questions about sustainability.

While US economic data have improved on balance and European data have not weakened as much as feared, there is probably too much uncertainty in the minds of Fed policymakers regarding fallout from Brexit for them to be confident that conditions will allow for a hike in a couple of months.  The renewed drop in oil prices likely underscores that uncertainty.  And, the stronger dollar is a negative in the outlook for US exports.

The post-winter speedup in the US economy, meanwhile, is modest.   The Atlanta Fed and NY Fed models project 2.2-2.4% for Q216 Real GDP Growth, slightly below the 2.6% consensus estimate.  The Q216 GDP report is due on Friday, with only tomorrow's Durable Goods and New Home Sales data still to be incorporated in the calculation.  

Nevertheless, US economic growth appears to be speeding up into Q316 -- although there is still a question about sustainability.  The NY Fed model's early projection is for 2.6% Real GDP Growth in Q316.   And the ECRI Leading Index has begun to make new highs, again.  While modest, these projections are above the 1.8-2.0% longer-range targets of the Fed.

         a.  Most of the increase in Q2 GDP is in consumption, which could be boosted in part by a temporary post-winter catch-up (but which could extend into Q3, given the cold Spring).   So, some slowing in consumer spending ahead would seem to be reasonable expectation -- and making the question of sustainability of the speedup still open.

         b.  Some of the speedup seen for Q3 GDP Growth also could be a result of the slight Fed easing in June, when they cut their forward guidance slightly to 1.5 hikes from 2 hikes in the remainder of the year.  

Despite the uncertainty about the sustainability of stronger US economic growth, upcoming US economic data are likely to continue to strengthen -- which should be a positive for stocks and a negative for Treasuries.  Wednesday's data on June Durable Goods Orders may very well surprise to the upside, after they have lagged the improvement seen in the Mfg ISM.   The Mfg ISM, itself, may climb further in July, based on the gain seen in the Markit US Mfg PMI, released last week.   The Markit Mfg PMI correctly predicted the direction of Mfg ISM in each of the past 4 months.