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Q2 real GDP growth rose at a 2.3% annual rate, following an upwardly revised 0.6% increase in Q1, while the PCE deflators showed a pickup in Q2 inflation rates. Stronger consumer spending and an improved net export position fuelled the Q2 GDP advance. Residential investment moved higher but fixed non-residential capex spending on equipment pulled back last quarter. We see GDP growth averaging around 2.8% in the second half.
As expected, there was no change in the fed funds target range (0 to 0.25%). The Fed's read on recent economic data was slightly more upbeat than in June, citing solid job gains, declining unemployment and diminished labor market slack. This suggests to us that the economy continues to move closer to meeting the FOMC's conditions to begin rate normalization.
Oil's recent fall, much more brutal than that of most other commodities, shows the extent to which the correlation between oil and agricultural prices has weakened. Energy is one of main variable costs of agricultural production, but its economic impact remains indirect, and varies depending on crops, regions and years. Agrofuels now play a reduced role because their consumption has stabilised and is governed primarily by regulatory framework.
No rate hikes are expected in July. Our base case remains a September lift-off. Fed officials are looking for more evidence that economic growth is sufficiently strong and labor market conditions continue to firm enough to return inflation to the Committee's longer-run 2% objective over the medium term before beginning the process of rate normalization.
Signs of a market recovery have emerged in recent months. We should not overestimate them however. They mostly concern new-build housing. Sales bounced back sharply in Q1 2015, to 14% over 12 months in the developer new-build sector, and 15% for detached, non-developer homes. The pre-owned sector is more or less stable: despite a rise in sales in early 2015, there was a cumulative drop of 4% over 12 months, with house prices falling by 1.9% over 12 months in Q1.
US annual productivity growth has slowed since the 1970s, with a pronounced slowdown occurring during the recovery from the Great Recession. Weak productivity growth appears to reflect a combination of cyclical and structural factors as well as measurement issues.
Yesterday's decision by the ECB to increase ELA, even incrementally, is a positive surprise in terms of timing and a supportive signal to Greece. On the crucial assumption that Greece remains a member of the Eurozone, the ECB should continue to do just as much as it takes to keep Greek banks afloat through a further carefully calibrated ELA lift (as well as potentially loosening collateral haircuts) starting next week.
Edition July 21, 2015
France: New mortgage lending
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