Marketmind: Accelerating US economy sideswipes markets

[August 17, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

Far from the recession forecasts of earlier this year, U.S. economic growth may actually be accelerating in the second half of 2023 - upending bond and stock markets scrambling to reprice long-term inflation and interest rate assumptions.

After a blowout July retail sales report on Tuesday was followed yesterday by news of a surprising surge in U.S. industrial output and housing starts last month, third quarter U.S. gross domestic product estimates are ratcheting higher.

Although often a volatile model, the Atlanta FederalReserve's real-time 'GDPNowcast' estimate of current quarter GDP growth has soared to as high as 5.8% - its highest since January 2022 and more than twice what it was just one month ago.

That compares with the official estimates of second-quarter GDP growth at an annualized 2.4% - itself a significant upside surprise - and Wall St forecasters are re-drawing forecasts again. Deutsche Bank on Wednesday, for example, more than doubled its third quarter real GDP call to 3.1%.

With China's economy struggling under a weight of property sector, credit and geopolitical worries - and GDP forecasts there being revised down rapidly - U.S. growth could well outstrip it this quarter.

The implications of such resilience in U.S. activity in the face of more than five percentage points of interest rate rises in 18 months has forced many to rethink the sustainable interest rate level over the horizon and increase long-term projections.

The Fed itself, judging by minutes of its most recent policy meeting released on Wednesday, is still unsure whether it should raise rates again. It has its annual Jackson Hole conference later this month to nuance any guidance before it meets again in September.

For now, the constellation is seeing an ongoing repricing of bonds and 10-year Treasury yields topped 4.3% on Thursday for the first time since October.

A sign is seen outside the 11 Wall St. entrance of the New York Stock Exchange (NYSE) in New York, U.S., March 1, 2021. REUTERS/Brendan McDermid

And the restiveness of the bond market has unnerved stocks to boot - even though the earnings and interest implications of accelerating growth are competing influences.

After another heavy loss on Wall St indices on Wednesday, futures regained some ground ahead of the bell today. Ebbing oil prices might help as China's woes cut across energy demand forecasts.

Overseas, China's stocks stabilized tentatively after days of attrition but bourses elsewhere in Asia and Europe were in the red again.

The dollar is the big winner in the whole piece - soaring against China's yuan to its highest level of the year despite reports of Chinese state banks trying to prop up the renminbi.

The dollar's DXY index against developed market currencies surged to its highest in two months.

Events to watch for on Thursday:

* U.S. corporate earnings: Walmart, Applied Materials, Tapestry, Ross Stores, Keysight Technology

* U.S. weekly jobless claims, August Philadelphia Fed business survey, July leading indicator

* U.S. Treasury auctions 4-week bills

(By Mike Dolan, editing by Christina Fincher, [e-mail]. Twitter: @reutersMikeD)

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