Wall Street just traversed a gantlet: the busiest week of corporate quarterly results, fresh developments in global trade relations and a historic stock tumble by Facebook Inc. However, the headliner of this jam-packed week may be GDP, the official scorecard of the U.S. economy.
As one fixed-income strategist put it, never has a reading of gross domestic product held so much significance, with the three main equity benchmarks—the Dow Jones Industrial Average DJIA, +0.44% the S&P 500 index SPX, -0.30% and the Nasdaq Composite Index COMP, -1.01% —as well as the U.S. dollar DXY, -0.12% and Treasury TMUBMUSD10Y, +0.16% TMUBMUSD02Y, +0.16% markets primed for Friday’s highly anticipated print.
Here’s how Guy LeBas, head of fixed-income strategy for Janney Montgomery Scott, put it via Twitter on Thursday: “I can’t remember the last time the markets placed such importance on a #GDP number as they have with tomorrow. Given the perceived optimism, a miss could catch rates violently offside (i.e., rally risk),” he wrote.
I can’t remember the last time the markets placed such importance on a #GDP number as they have with tomorrow. Given the perceived optimism, a miss could catch rates violently offside (i.e., rally risk).
— Guy LeBas (@lebas_janney) July 26, 2018
What’s all the fuss about?
Second-quarter GDP data on Friday is set to be released at 8:30 a.m. Eastern and may reflect one of the fastest rates of economic expansion since a 5.2% print in the third quarter of 2014, and if it comes out ahead of that figure, it would be the best GDP report since 2003, writes MarketWatch’s Steve Goldstein.
Growing buzz around the possibility of such a strong read comes as the White House has been suggesting that the number from the Commerce Department will be huge.
On Thursday, White House economic adviser Larry Kudlow predicted that the second-quarter GDP release will live up to the billing.
“You’re going to get a very good economic growth number tomorrow. Big,” Kudlow told Stuart Varney on Fox Business on Thursday.
Consensus estimates from economists polled by MarketWatch indicate a rate of expansion of about 4.2%. Although the Federal Reserve’s GDPNow tracker was indicating a Q2 read of 3.8%, as of Thursday.
Fox Business reports that a strong number may be used as an excuse for the Trump administration to take a victory lap, claiming that late-2017 corporate tax cuts and a number of other stimulative measures enacted over the past several months are bearing fruit.
How will the market react to a stellar number? It’s hard to say. Perhaps not without some level of enthusiasm, as this tweet suggests:
But also not without some skepticism, amid a barrage of tariff threats and revisions to the data that some argue could inform results, as Natixis strategists Joseph LaVorgna notes:
— Joseph A. LaVorgna (@Lavorgnanomics) July 26, 2018
And as Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management, indicates via this Twitter thread:
1. A couple of observations need to be made in advance of tomorrow’s Q2 US GDP release, to put it in proper perspective amid the deluge of political high-fiving that’s likely to ensue. https://t.co/Wu5zmeHeSg
— Patrick Chovanec (@prchovanec) July 26, 2018
Others note that at least some of the growth can be attributed to a rush to get ahead of the Trump administration’s tariff threats, which have had an outsize impact on the soybean market, as David Rosenberg points out:
All eyes are on tomorrow’s Q2 GDP data. Most forecasts now are north of 4%. But here’s the rub. At least half the growth is coming from two trade-related issues – a soybean-led export burst and inventory accumulation. <1/2>
— David Rosenberg (@EconguyRosie) July 26, 2018
Ultimately, a reading that comes in too hot could fuel expectations that the Federal Reserve may need to ramp up its pace of rate increases, with the possibility of a further two rate increases in September and December likely to tamp down too-hot growth. That could knock bond prices lower, conversely pushing rates up and pressuring equity markets lower as investors worry about rising borrowing costs.
It is also unclear how the market may react to a report that comes in below estimates, since projections are so lofty.
On Thursday, investors mostly fixated on a decline in shares of Facebook FB, -18.96% which saw its worst day ever as a public company after a disappointing forecast for revenue, weighing on the broader market, although the Dow finished firmly higher. However, a string of otherwise rosy second-quarter earnings and an upbeat GDP may deliver just the right dollop of fuel to ignite the markets higher.
But how it all plays out is anyone’s guess.